0001 1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 6 REGULAR MEETING OF THE § TEXAS LOTTERY COMMISSION § 7 WEDNESDAY, APRIL 18, 2007 § 8 9 COMMISSION MEETING 10 WEDNESDAY, APRIL 18, 2007 11 12 BE IT REMEMBERED THAT on Wednesday, 13 the 18th day of April 2007, the Texas Lottery 14 Commission meeting was held from 9:00 a.m. to 15 2:51 p.m., at the Offices of the Texas Lottery 16 Commission, 611 East 6th Street, Austin, Texas 78701, 17 before CHAIRMAN JAMES A. COX, JR., and COMMISSIONER C. 18 TOM CLOWE, JR. The following proceedings were 19 reported via machine shorthand by Aloma J. Kennedy, a 20 Certified Shorthand Reporter of the State of Texas, 21 and the following proceedings were had: 22 23 24 25 0002 1 APPEARANCES 2 CHAIRMAN: 3 Mr. James A. Cox, Jr. 4 COMMISSIONER: Mr. C. Tom Clowe, Jr. 5 GENERAL COUNSEL: 6 Ms. Kimberly L. Kiplin 7 EXECUTIVE DIRECTOR: Mr. Anthony J. Sadberry 8 CHARITABLE BINGO ASSISTANT DIRECTOR: 9 Mr. Phil Sanderson 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 TABLE OF CONTENTS 2 PAGE NO. 3 AGENDA ITEM NO. I - Meeting Called to Order.. 8 4 AGENDA ITEM NO. II - Report, possible discussion and/or action on the agency's 5 Survey of Organizational Excellence.......... 8 6 AGENDA ITEM NO. III - Report, possible discussion and/or action on the 7 implementation of recommendations contained in the Internal Audit Report 8 on bingo audit services, including development of rules......................... 103 9 AGENDA ITEM NO. IV - Consideration of and 10 possible discussion and/or action, including adoption of repeal, 16 TAC §402.603, 11 relating to bonds or other security.......... 114 12 AGENDA ITEM NO. V - Consideration of and possible discussion and/or action, 13 including adoption, on new 16 TAC §402.603 relating to bonds or other security.......... 114 14 AGENDA ITEM NO. VI - Consideration of and 15 possible discussion and/or action, including adoption, on new 16 TAC §402.505 16 relating to permissible expenses............. 116 17 AGENDA ITEM NO. VII - Report, possible discussion and/or action on 16 TAC §402.300 18 relating to pull-tab bingo and/or §402.305 relating to progressive bingo................ 122 19 AGENDA ITEM NO. VIII - Report, possible 20 discussion and/or action on new 16 TAC §402.204 pertaining to prohibited price 21 fixing....................................... 123 22 AGENDA ITEM NO. IX - Report by the Charitable Bingo Operations Director and 23 possible discussion and/or action on the Charitable Bingo Operations Division's 24 activities................................... 125 25 0004 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 AGENDA ITEM NO. X - Report, possible discussion and/or action on lottery 4 sales and revenue, game performance, new game opportunities, market research, 5 and trends................................... 127 6 AGENDA ITEM NO. XI - Report, possible discussion and/or action on transfers 7 to the State and agency budget............... 147 8 AGENDA ITEM NO. XII - Report, possible discussion and/or action on Lottery 9 Operations and Services contract Amendment No. 8 credit calculation........... 160 10 AGENDA ITEM NO. XIII - Report, possible 11 discussion and/or action on the FY 2008-09 Legislative Appropriation Request............ 149 12 AGENDA ITEM NO. XIV - Report, possible 13 discussion and/or action on the 80th Legislature............................. 163 14 AGENDA ITEM NO. XV - Consideration of and 15 possible discussion and/or action on the lottery operator contract, including 16 approval of an amendment to the lottery operator contract and/or whether the 17 negotiation of the lottery operator's contract in an open meeting would have a 18 detrimental effect on the Commission's position in negotiations of the lottery 19 operator contract............................ 170 20 AGENDA ITEM NO. XVI - Report, possible discussion and/or action on the agency's 21 contracts.................................... 179 22 AGENDA ITEM NO. XVII - Report, possible discussion and/or action on the agency's 23 HUB program and/or minority business participation, including the agency's 24 Mentor Protégé Program....................... 179 25 0005 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 AGENDA ITEM NO. XVIII - Consideration of and possible discussion and/or action on 4 external and internal audits and/or reviews relating to the Texas Lottery Commission 5 and/or the Internal Audit Department's activities................................... 183 6 AGENDA ITEM NO. XIX - Report, possible 7 discussion and/or action on the Mega Millions game and/or contract................ 183 8 AGENDA ITEM NO. XX - Report, possible 9 discussion and/or action on GTECH Corporation ........................... 59 10 AGENDA ITEM NO. XXI - Commission may meet 11 in Executive Session: A. To deliberate the duties and 12 evaluation of the Executive Director and/or Deputy Executive Director 13 pursuant to Section 551.074 of the Texas Government Code. 14 B. To deliberate the duties and evaluation of the Internal Audit 15 Director pursuant to Section 551.074 of the Texas Government Code. 16 C. To deliberate the duties, appointment and/or employment of the Charitable 17 Bingo Operations Director pursuant to Section 551.074 of the Texas 18 Government Code. D. To deliberate the duties, appointment 19 and/or employment of an Acting Charitable Bingo Operations Director 20 pursuant to Section 551.074 of the Texas Government Code. 21 E. To deliberate the duties of the General Counsel pursuant to Section 22 551.074 of the Texas Government Code. 23 24 25 0006 1 TABLE OF CONTENTS (continued) 2 PAGE NO. F. To receive legal advice regarding 3 pending or contemplated litigation pursuant to Section 551.071(1)(A) 4 and/or to receive legal advice regarding settlement offers pursuant 5 to Section 551.071 (1)(B) of the Texas Government Code and/or to 6 receive legal advice pursuant to Section 551.071(2) of the Texas 7 Government Code, including but not limited to: 8 Cynthia Suarez v. Texas Lottery Commission 9 Shelton Charles v. Texas Lottery and Gary Grief 10 Stephen Martin vs. Texas Lottery Commission 11 First State Bank of DeQueen et al. v. Texas Lottery 12 Commission Employment law, personnel law, 13 procurement and contract law, evidentiary and procedural 14 law, and general government law 15 Lottery Operations and Services contract 16 Mega Millions game and/or contract 17 G. To deliberate the negotiation of the lottery operator's contract 18 pursuant to Section 467.030 of the Texas Government Code.............. 186 19 AGENDA ITEM NO. XXII - Return to open 20 session for further deliberation and possible action on any matter discussed 21 in Executive Session......................... 188 22 23 24 25 0007 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 AGENDA ITEM NO. XXIII - Consideration of the status and possible entry of orders in: 4 A. Docket No. 362-07-1809 - Dewey Convenience Store 5 B. Docket No. 362-07-1814 - Jay's Wine & Spirits, No. 142184 6 C. Docket No. 362-07-1815 - Handy Stop D. Docket No. 362-07-1546 - Buy Low 7 Liquor E. Docket No. 362-07-1651 - Stop 'N Save 8 F. Docket No. 362-07-1655 - R & B Mini Mart 9 G. Docket No. 362-07-1653 - Watts Grocery H. Docket No. 362-07-1550 - Sunny Food 10 I. Docket No. 362-07-1652 - Corner Stop Store 11 J. Docket No. 362-07-1354 - La Porte Food Mart, Inc. 12 K. Docket No. 362-07-1372 - Cracker Barrel #1 13 L. Docket No. 362-07-1525.B - Jerry L. Lopez 14 M. Docket No. 362-07-1524.B - Jeffrey S. Carpenter 15 N. Case No. 2007-173 - Friend Food Mart.. 188 16 AGENDA ITEM NO. XXIV - Report by the Executive Director and/or possible 17 discussion and/or action on the agency's operational status, activities relating to 18 the Charitable Bingo Operations Division, agency procedures and FTE status............. 184 19 AGENDA ITEM NO. XXV - Public Comment......... 194 20 AGENDA ITEM NO. XXVI - Adjournment........... 194 21 22 REPORTER'S CERTIFICATE........................ 195 23 24 25 0008 1 P R O C E E D I N G S 2 WEDNESDAY, APRIL 18, 2007 3 (9:00 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN COX: Good morning. It's 6 9 o'clock. Today is Wednesday, April 18, 2007. 7 Commissioner Clowe is here. I'm Jim Cox. Let's call 8 this meeting of the Texas Lottery Commission to order. 9 AGENDA ITEM NO. II 10 CHAIRMAN COX: Agenda Item No. II, 11 report, possible discussion and/or action on the 12 agency's Survey of Organizational Excellence. 13 Ms. Hernandez. 14 MS. HERNANDEZ: Good morning, 15 Commissioners. For the record, my name is Dale 16 Hernandez, and I'm the agency ombudsman. With me 17 today is Janine Mays, the Human Resources Director, 18 and Noel Landuyt from The University of Texas 19 Organizational Excellence Group. His group 20 administers the Survey of Organizational excellence. 21 Dr. Landuyt will give an overview of the 22 survey and our results, and Janine and I will present 23 more detailed information. Dr. Landuyt. 24 DR. LANDUYT: Good morning. Again, my 25 name is Noel Landuyt, and I've over at The University 0009 1 of Texas. And I work with the Organizational 2 Excellence Group. And what we do is produce for the 3 state surveys of employee attitudinal assessments for 4 most state agencies. 5 Just a brief history of the survey. It 6 did begin back in the late seventies, actually, when 7 Clements was governor and they wanted to have an 8 assessment of human resources; they wanted to have a 9 job satisfaction survey. And at that time Clements 10 went to UT, found a couple of expertise there, set up 11 a survey and began conducting it. 12 That survey continued and that process 13 continued as they surveyed only the large state 14 agencies, about 10 percent. But when the state 15 adopted strategic planning instructions in the early 16 nineties when Governor Richards and Lt. Governor 17 Bullock were in place, it became part of the state's 18 strategic plan which all state agencies, as a regular 19 occurrence within the agencies, have to do an 20 assessment of human resources, and we're listed as a 21 source for that. 22 So currently this part of the strategic 23 planning process of the state, it comes out of the LBB 24 and the Governor's office of Budget and Planning. We 25 also provide the results both to Sunset and to the 0010 1 Audit's office and, upon request, from legislative 2 offices and to the agencies. And we have been doing 3 that -- I have been doing that since 2000. And 4 currently we survey almost all state agencies, about 5 87 state agencies our last go-round and about 200,000 6 employees, and we do that on a regular basis. 7 The survey is an attitudinal assessment. 8 It's a perceptual survey from employees. It goes 9 directly to employees. We collect the data. We 10 gather it. We sum it up and return it. I'll talk a 11 little bit, as we go through the structure of the 12 survey, what kind of data we collect. We do it all on 13 line. We do, again, all employees. We do a census 14 strategy. We don't sample. 15 We did that in February of this year, 16 and we coded out 11 units and three staffing levels 17 within the agency. And the survey also has the 18 ability to have additional questions added, and the 19 agency added 20 additional items. 20 The first thing we always look at in the 21 survey is what the response rate is. And Lottery had 22 a very high response rate of about 80 percent. Now, 23 it doesn't get a whole lot better than that. You 24 could possibly get 85, but very few agencies do. In 25 fact, if you look at the bottom bar, the bottom gold 0011 1 bar goes up to 80 percent. That's where Lottery was. 2 And then return what we call three 3 benchmark data for the state. The first one, S, is 4 agencies of similar size. We group the state agencies 5 into six different size categories. And so agencies 6 of a similar size to Lottery scored a little less than 7 60 percent. We then break it into similar missions, 8 those articles that the state has: Public safety, 9 education, regulatory, what have you. 10 Lottery is economic development. Is 11 that correct? -- yes -- and all agency average is 12 about 65 percent. So the agency scored higher than 13 our agency benchmarks that we provide for the state. 14 If you look at the over time benchmark, that graph, 15 that line graph at the top back in 2000 had a 16 52 percent response rate. But for the last two or 17 three iterations, you've had a very high response 18 rate. That just signifies to us that you have 19 employees willing to give their opinion, willing to 20 express themselves. And also it speaks quite clearly 21 that it's valid and reliable data. 22 As we look into the survey, the survey 23 is divided into five different dimensions: Work 24 group, accommodations, organizational features, 25 information and personal. And I'll break those down 0012 1 on the next slide. But what you can see here is, this 2 just gives you kind of an eye-in-the-sky look. Again, 3 the gold bar, for example, in work group for the 4 agency is at 355. That's on a 500 point scale, from 5 100 to 500. 6 That's how the agency scored relative to 7 the benchmark data that we have. Again, as to similar 8 size, M is mission and A is all agencies. And in all 9 cases, the agency was either at or exceeded where the 10 benchmark was. Now, what does that say? That just 11 basically says that when you look at the agency in 12 comparison with the rest of the state, all other state 13 agencies, everything from criminal justice to 14 licensing regulation to any of the health and human 15 service agencies, that the agency scores at that level 16 compared to those benchmarks. 17 This is kind of where you start to get 18 into the meat, though, of the presentation. Each one 19 of those dimensions are broken into constructs. For 20 example, let's look at the top one, work group. We 21 look at the effectiveness of supervision as perceived 22 by employees, fairness, team effectiveness and 23 diversity. The coloration on this slide uses the 24 logic that the lowest ones are in red, the highest 25 ones are in blue. 0013 1 The next one is accommodations: 2 Perceptions of pay, physical environment, benefits and 3 employee development -- that's training. You have two 4 verity high scoring concepts within that dimension. 5 Organizational features looks at how 6 change oriented the organization is, goal oriented, 7 holographic, strategic and quality. I should explain 8 holographic. Holographic is a concept of an 9 organization. It's more or less does the right hand 10 of the organization know what the left hand is doing? 11 It's how much internal consistency there is within the 12 agency. I like to characterize it as if you call the 13 agency, are you able to, you know, get to the place 14 that you need to get upon your first call, or is there 15 some problems with how the agency might respond 16 holographically? 17 Strategic and quality, though, were very 18 high scoring. Typically scores above 400 are 19 outstanding, and those are both right at about the 400 20 level. 21 Information looks at internal 22 communication, availability of information to get your 23 job done. And external communication looks at how 24 well the agency responds and communicates with its 25 external constituency. 0014 1 And the last one is kind of a 2 traditional organizational assessment that we see: 3 Job satisfaction, time and stress, burnout and 4 empowerment. 5 A methodological note here: The higher 6 the score on time and stress and burnout, the better. 7 If it's a higher score, it's scored in such a way that 8 that's a positive, not a negative. So high time and 9 stress scores and burnout scores do not imply a 10 burnout in time and stress. 11 When we look at this, I see a pattern 12 which is fairly familiar to agencies. Most agencies 13 score between a 325 and a 375. You-all kind of kicked 14 up a notch there. Most agency -- well, all state 15 agencies, I think fair pay is the lowest scoring 16 construct. But, actually, 320 is not all that bad. 17 Supervisory and team effectiveness also 18 are commonly lower scoring constructs, and so is 19 internal communication. What that signifies for me is 20 that the organization has good internal variability. 21 And so there are some areas which, you know, possibly 22 could get looked at, how we improve supervision, how 23 we improve perceptions of pay, how we improve internal 24 communication. But it also speaks to the pride that 25 employees have when it comes to quality and strategic 0015 1 orientation. And the time and stress number is pretty 2 high, and that's very positive. 3 This slide gives you an over time 4 comparison. This looks at from last time to this time 5 the data was taken. So we're looking, you know, over 6 the last year, and we're looking to see what the 7 changes in the score are. 8 The scores have not changed very much at 9 all in the work group. In fact, a 1-to-3 change in 10 the score, probably a 1-to-6 change in the score does 11 not probably represent a statistical difference upon a 12 change in score. It's probably pretty flat 13 You have to go down to change oriented, 14 holographic and strategic. You see that those are 15 moving in a positive direction. While internal 16 communication was one of the lower scoring constructs 17 on the other side, it has shown the most improvement. 18 Availability of information may have 19 declined, but that statistically is probably not a 20 difference. And external communication went up, and 21 empowerment probably went up statistically. So what 22 we have is, we have a positive movement along some of 23 those different constructs and sort of a flat, not a 24 lot of change between the two. 25 And I should add that flat does not 0016 1 necessarily denote a bad thing. A lot of times it 2 means a stability or a stabilizing within the 3 organization. What you don't want to see is all those 4 bars going the other way. And in this case they're 5 not. 6 What we do is that we work with the 7 agencies to participate, to prepare for the survey and 8 then to administer it, and that went very successfully 9 within the organization. We were able to generate 10 several different reports within different parts of 11 the organization. And the administration is very 12 successful with a high response rate. 13 The interpretation of the data is kind 14 of what we're doing right here. It's providing the 15 data back to you-all, answering any questions, and 16 then you really move into -- we use an intervention 17 model -- how do you act upon those things to improve 18 the agency and the organization? 19 So that's kind of the cycle that we do 20 with participation occurring again. Typically we ask 21 the agency to participate this summer. We do it after 22 the legislative session. And the Lottery has 23 participated on an annual basis, on a slightly 24 different cycle than the rest of the state. 25 I would be happy to address any 0017 1 questions, move back to a slide if you had any. And I 2 know that there is a further discussion and 3 conversation on this 4 COMMISSIONER CLOWE: Not now. 5 MS. HERNANDEZ: Okay. 6 COMMISSIONER CLOWE: Later. 7 MS. HERNANDEZ: Janine and I going to 8 present a little more detail on the agency as a whole. 9 In preparing for the survey, we met with 10 the state auditor's office for input on question 11 development, and we also met with them to review the 12 results and compare them with previous surveys. The 13 survey results were also posted to the agency intranet 14 for staff to review, and the results were presented at 15 the all-staff meeting which was held on April 12th. 16 Some of the SAO's concerns from the 17 workforce management audit are shown on the next two 18 slides. The first slide shows the percentages of 19 agency employees who agree or strongly agree with the 20 statements. As you can see, the responses to these 21 statements have improved slightly. The responses to 22 the statement, "People who challenge the status quo 23 are valued" continue to be on the lower end but have 24 improved. 25 The second slide shows the average 0018 1 scores for the same statements. The statements were 2 scored on a scale of 1 to 5, with 1 corresponding to 3 strongly disagree and 5 corresponding to strongly 4 agree. 5 The next slide shows some of the lower 6 scoring statements from the most recent survey, 7 compared with the two previous surveys. And you have 8 a list in your notebook of the 25 lowest scoring 9 statements, including statements about pay and 10 benefits. And this slide focuses on the workplace 11 related issues. 12 The statements highlighted in yellow are 13 the concerns raised by the state auditor's office and 14 their workforce management audit. All of the 15 statements shown here have consistently ranked among 16 the lower scores in previous surveys. And although 17 scores have improved, these areas remain areas of 18 concern for the agency. 19 MS. MAYS: Most of the statements shown 20 here deal with trust and communication and employees' 21 perceptions of how they and their opinions are valued. 22 While we continue to move forward in these areas, we 23 can still improve. Executive staff is working on ways 24 to address the areas that need improvement. The plans 25 may include voluntary employee work groups or 0019 1 management training. 2 MS. HERNANDEZ: This slide shows the pay 3 and benefits statements. I broke them out so that it 4 would be easier to read. The pay and benefits issues 5 also consistently rank among the lowest scoring 6 responses. And I would also like to recognize that I 7 have received full support from the agency staff and 8 management. And in particular, Information resources 9 has been very helpful in getting this information out 10 on the intranet. 11 I would like to recommend that the 12 agency conduct another survey in fiscal year 2009, 13 preferably in September or October of 2008, to give 14 staff a little time to relax, and perhaps we could 15 implement some changes that would create some 16 improvement in our survey results. That would be 17 approximately 18 months from now. But I would like to 18 know your opinion on the survey frequency as well. 19 This concludes our presentation, and we 20 would be happy to answer any questions. 21 CHAIRMAN COX: Chairman Clowe? 22 COMMISSIONER CLOWE: I would like to 23 hear from Director Sadberry and hear what his reaction 24 is, please. 25 MR. SADBERRY: Good morning. For the 0020 1 record, I'm Anthony Sadberry, Executive Director, 2 Chairman and Commissioner. 3 I would like to thank ombudsman and 4 Janine, HR director -- Ms. Mays -- for their work on 5 this survey, and I appreciate the assistance we 6 received as well from The University of Texas. 7 As I have stated in the all-staff 8 meeting, I also in this meeting would like to 9 recognize with appreciate the participation level that 10 we received from our staff. As Dale has indicated, 11 they have gone through a lot of surveys recently and 12 have participated in this survey at this level. We 13 really appreciate that because, as stated, I think it 14 does lend legitimacy to the survey itself and the 15 process and the confidence level of staff in 16 participating in the survey. 17 My general comments are -- and I 18 believe, as Janine states, we are gratified with the 19 notion that within about a year of time lapse between 20 the most recent SOE survey as well as the state 21 auditor's survey conducted in connection with the 22 workforce audit, that we are seeing movement in the 23 direction we wish to see, as Janine points out. 24 And we agree, there is (a) room to 25 continue to improve; and (b) there are areas that 0021 1 still raise concerns that we need to address. And it 2 tells us where we need to do our work, and there is 3 work that needs to be done. 4 I might add that -- Dale pointed out 5 that we requested the assistance of the state 6 auditor's office in formulating the structure of the 7 survey, and they rendered their assistance. They also 8 came back at the end of the survey, once we received 9 the results, and assisted in the interpretation of 10 those results. 11 One of the things I believe that was 12 pointed out by the auditor's office, the previous 13 survey results were that we perhaps did not interpret 14 them consistently with the way the auditor's office 15 felt the data could have been interpreted, to give us 16 a more meaningful indication of our standing. And I 17 believe I'm correct in stating that the auditor's 18 office is satisfied with the survey and feels that 19 progress is being made which is, of course, important 20 to us. 21 Finally on the frequency, we have 22 discussed this, and I would agree that -- the 23 auditor's recommendation was that we conduct a survey 24 at least once every two years. The Commission 25 preference was that we do it on an annual basis, at 0022 1 least up to this point. And I would agree that the 2 interval can be looked at. I think we do want to be 3 able to continue to measure on a frequent basis our 4 progress and the results of what we are doing from the 5 management standpoint. We also want to balance that 6 with recognizing the effort that goes into this from 7 the staff's standpoint. And I would hope -- I agree, 8 I would like the hear the Commissioners' views on 9 this. But I would hope that we can strike that 10 balance in terms of conducting the next survey. 11 But I believe that overall, the bottom 12 line is, we're gratified with the participation level, 13 with the trends that show us moving in a positive 14 direction and also the indication of work that remains 15 to be done, and we're committed to that. We have 16 received some guidance in terms of how we use this at 17 the director level to come up with ways that are 18 meaningful and using them in implementing the data in 19 a constructive way, perhaps going away from the 20 standard methods we've done in the past, not totally, 21 but perhaps envisioning more creative ways that we can 22 use this data in helping us to continue to improve the 23 culture. 24 We also have indicated to the staff that 25 we will be communicating back with them as we go about 0023 1 this process so that they will know what we're doing 2 about it. One of the concerns I believe last year was 3 that there was not as immediate and as full disclosure 4 as perhaps had been hoped for from the staff's 5 standpoint of what we were going to do with the data 6 once we received it. 7 And we have committed and we are 8 committed to using this data in a meaningful way so 9 that it doesn't end here with the presentation of the 10 survey results but we actually use this as a beginning 11 point to move forward with implementation. 12 So, again, I thank our ombudsman. You 13 are aware, obviously, that she is a full-time internal 14 auditor, and the internal auditor has supported her 15 serving in this capacity as the agency ombudsman. And 16 this has been one indication of several we could 17 mention of the very effective work has been done 18 there, and I express my appreciation for that, as well 19 as the HR Director's and her staff's participation. 20 COMMISSIONER CLOWE: Do you want to take 21 the first whack or do you want me to? 22 CHAIRMAN COX: Why don't you take the 23 first whack. 24 COMMISSIONER CLOWE: I have some 25 concerns that I want to talk with you about and ask 0024 1 some questions regarding this survey and prior 2 surveys. Noel, were you here when the last survey was 3 presented after it was taken? Were you involved in 4 that? 5 DR. LANDUYT: I have involved in the 6 data collection but not the presenting back of the 7 data. 8 COMMISSIONER CLOWE: You have told us 9 this morning that there's not much change. And what 10 change there is that's significant is positive. When 11 the state auditor came in and did their survey, in my 12 mind, they swept this survey aside from the prior 13 period and said, "Well, that's not valid and we're not 14 accepting that," and they did their own survey. 15 And the report that they came back to us 16 with wasn't good at all. And specifically and 17 particularly it showed at -- and I really don't like 18 to characterize it this way because I don't think it's 19 a true picture -- but at the lower levels of the 20 organization -- and to me those are very, very 21 important levels -- there was a real concern about the 22 lack of openness and the trust and the communications, 23 and they pointed that out very clearly to us. 24 And now you're presenting this survey to 25 us, and you're not saying anything about that. You're 0025 1 saying, "If anything, well, it's about the same as it 2 was the last time we did it, or maybe it's a little 3 bit better." I'm not comfortable with that. Would 4 you speak to that? 5 DR. LANDUYT: I certainly will. Our 6 assessment -- and, honestly, I'm not sure what the 7 auditor's assessment was exactly, unless it did focus 8 on communication, trust and openness. 9 COMMISSIONER CLOWE: That's what it 10 focused on. 11 DR. LANDUYT: Okay. 12 COMMISSIONER CLOWE: And that's what I'm 13 concerned about. 14 DR. LANDUYT: Our organizational 15 assessment is much broader than that, and it has a 16 framework which looks at 20 different dimensions of 17 the organization. When you look at our assessment 18 on -- the side that's got the constructs on it -- when 19 you look at our assessment, effectiveness and 20 supervision, internal communication and particularly 21 team effectiveness, all three of those constructs are 22 our low-scoring constructs. 23 That would seem to me to coincide with 24 what the auditor's office had presented, because our 25 supervisor effectiveness construct looks at items such 0026 1 as is there basic trust between supervisors? It looks 2 at people challenging the status quo. 3 Internal communication, while up, does 4 look at the ability for information to pass within the 5 organization. So the auditor's office -- again, maybe 6 this is the reason why they designed the assessment 7 they did -- took a look at those low areas and did a 8 special assessment just on that. 9 Our assessment, though, looks at those 10 broader issues as well. It's a much broader tool, if 11 you will. It didn't focus primarily on those three 12 different areas. So when I look and evaluate the 13 organization, I look at it from all different -- all 14 20 different levels of construct which shows -- and it 15 seems to coincide with that the auditor said. There 16 is -- even on our assessment, internal communications, 17 supervisory effectiveness and team effectiveness are 18 low scoring, so that seems to correspond quite nicely. 19 Now, without looking at the auditor's 20 items, I'm not quite sure, you know, what they did. 21 But I don't believe that the auditor looked at time 22 and stress and burnout. Maybe they did. 23 COMMISSIONER CLOWE: Well, I want you to 24 know that we looked at the auditor's report and it 25 certainly pointed that weakness out, and that does not 0027 1 give me comfort to see your report now. If you missed 2 it the last time you did it, I think you're missing it 3 again this time. And we want to drill down to those 4 areas that the SAO focused on and told us we were not 5 performing correctly. 6 And I can tell you the House Licensing 7 Committee was very focused on that, and it's the 8 reason Dale is in the job -- yes, Dale is in the job 9 that she is in today and one of the real charges that 10 Janine has received in the last year, and certainly a 11 thing that Director Sadberry and his senior staff are 12 all focused on. 13 And my concern and my question is, how 14 are we really doing with this issue of communication 15 and trust and openness? The very heart of the problem 16 that the state auditor's office focused in on, which I 17 don't think is reflected in this report. 18 MS. HERNANDEZ: Well, Commissioner, it 19 is reflected -- it might not be reflected at this 20 level, but -- 21 COMMISSIONER CLOWE: It isn't. And it's 22 too general and it doesn't satisfy me. 23 MS. HERNANDEZ: Okay. Well -- and I 24 understand that, because it is a pretty global 25 overview. 0028 1 COMMISSIONER CLOWE: It's too global. 2 MS. HERNANDEZ: Yes. And that's why -- 3 that's one of the reasons that Janine and I have been 4 closely looking at the state auditor's concerns and 5 drilling down to that level and trying to present that 6 to staff and management as well because, you know, 7 when you look at it at this level, you won't see it. 8 But if you -- you see it in a broad sense. 9 But we're focusing on the issues the 10 state auditor had. And when we met with the state 11 auditor, we discussed that. And they were actually 12 pleased at the progress we've made, although that 13 remains -- those were main areas of concern. So we 14 are trying within the agency to focus on that and be 15 open and report on those areas that still have a ways 16 to go. 17 MS. MAYS: In fact, the -- 18 COMMISSIONER CLOWE: Just a minute, 19 Janine. 20 MS. MAYS: Okay. 21 COMMISSIONER CLOWE: Let's talk about 22 that. 23 MS. HERNANDEZ: Okay. 24 COMMISSIONER CLOWE: I would like to 25 talk about you and your job. You're part of this and 0029 1 you have come on the scene as a result of the survey 2 the SAO did and the changes that Director Sadberry has 3 instituted here. Tell us a little bit about your 4 qualifications. What qualifies you to do this job? 5 MS. HERNANDEZ: Well, as you know, I am 6 part of the Internal Audit group. And I have been an 7 auditor for many, many years, and I've also got 8 experience in budget and finance -- financial 9 analysis. And during that time, during my experience, 10 I've had to work with various levels of all the 11 organizations I've worked for, from the city manager 12 when I worked for the city, on down to staff. 13 I've taken interviewing training and 14 listening skills training. And I, as an auditor, have 15 to adhere to the professional standards of 16 independence. And that lends itself nicely to my role 17 as ombudsman because that's one of the key things an 18 ombudsman should be, is independent and neutral. And 19 I feel like my audit experience really has helped me 20 learn that and really lived that philosophy. 21 I've also been attending the Ombuds of 22 Texas meetings and reaching out to other ombudsmen 23 throughout the state, both in the public and private 24 sector. But really, my experience with -- just my 25 experience with dealing with sensitive information and 0030 1 talking to people -- that's a big part of what I've 2 done my entire career -- I think has benefited me 3 greatly as ombudsman. 4 COMMISSIONER CLOWE: So you're 5 comfortable in this position? 6 MS. HERNANDEZ: Yes, sir, I am. 7 COMMISSIONER CLOWE: And you started out 8 part time and now you're full time? 9 MS. HERNANDEZ: Well, actually, I'm in a 10 dual role. I'm still assuming my internal audit 11 duties and doing the ombudsman as well. So during the 12 survey analysis, it's been a little more part -- full 13 time, rather -- but normally, as time has gone on -- 14 initially when the ombudsman role was established 15 here, I had quite a few visitors. And that's kind of 16 dwindling off a little. People still do come to see 17 me. People still stop me in the hall. But I'm not 18 getting a constant stream of people coming into my 19 office. So my ombudsman role is more part time than 20 my audit role. 21 COMMISSIONER CLOWE: So you're 22 performing this, one might say, on an as-needed basis, 23 on demand? 24 MS. HERNANDEZ: Yes, you might say that, 25 although I do give Director Sadberry an update every 0031 1 week on what's going on. We do have meetings. So I 2 try to address the ombudsman role weekly, although 3 it's not 40 hours a week by any stretch -- when I'm 4 not working on the survey -- but whatever is needed is 5 how I've been addressing it thus far. 6 COMMISSIONER CLOWE: Do you feel that 7 you're effective in this role? Are the employees, in 8 your opinion, knowledgeable that you're there and 9 you're available and are they -- you have already 10 indicated that you had greater calls initially than 11 you're having currently. But do you think the 12 employees feel that it's worthwhile to come to you and 13 they can receive some benefit from talking with you 14 and laying their issues before you? What's your take 15 on that? 16 MS. HERNANDEZ: Well, I do feel that 17 whoever has come to me has gotten something out of the 18 process. And I think people are comfortable with me. 19 Even people who haven't come to me officially as 20 ombudsman or had a serious concern have stopped me in 21 the hall to chat, or they're aware of what's going on 22 with the survey. The staff really is aware of 23 everything. So I think they trust me. That's my 24 opinion. But I think they trust me and I think they 25 feel comfortable coming to me. 0032 1 And sometimes people get busy different 2 types of the year. The holidays seem to be a little 3 tougher time for people, and I did have some traffic 4 during that time. Sometimes people just want to 5 listen. And they do come to me to express some 6 concerns. So I do feel it's been a successful tool 7 for employees to use. And I do feel that Janine and 8 her staff has been very helpful to me personally. And 9 I think that some of what's happening is, people are 10 more comfortable going to her as well. 11 COMMISSIONER CLOWE: We're going to get 12 to her in a minute. 13 (Laughter) 14 I want you to be comfortable in your 15 work, and I want you to feel that you're qualified, 16 that you're getting all the support you need. But I 17 want you to be -- and I hope I can speak for the 18 Chairman on this -- I want you to be an advocate for 19 communication, for openness, for the opportunity that 20 every employee wants, deserves and will have, to have 21 their issues addressed. And by that, I don't mean a 22 yes answer to every question that they ask or want -- 23 MS. HERNANDEZ: Right. 24 COMMISSIONER CLOWE: -- but to have the 25 issue addressed. And I hope in the directors' meeting 0033 1 that you emphasize that frequently and you bring up 2 what brought about your office and what the task is 3 here for the supervisors in this agency, because to a 4 certain extent, any time an employee feels that they 5 come to you, that reflects back on their supervisor. 6 Now, a supervisor can't deal with 7 something that they don't know anything about. If a 8 person chooses not to come to them, they can't act on 9 it. But there is a conscious choice on the part of 10 the individual in most cases, I think, not to go to 11 their supervisor but to come to you or come to Janine. 12 MS. HERNANDEZ: Right. 13 COMMISSIONER CLOWE: And it's the 14 supervisor's role in this agency to encourage people. 15 It's part of the culture change that we're trying to 16 implement here, to feel that they can come to their 17 supervisor and receive fairness and a hearing about 18 their issues, and that's a team effort. You can't do 19 that by yourself; Janine can't do it. The director 20 can't do it. But you need to emphasize that and be an 21 advocate for that. 22 MS. HERNANDEZ: And I have been trying 23 to do that. And I've actually presented some training 24 at the managers' training, presented information about 25 the ombudsman's office. And also I've been invited by 0034 1 several managers to come to their staff meetings and 2 present information. 3 So I'm trying to reach out to them, and 4 they are reaching out to me. And I think it's been a 5 pretty good partnership so far. I see people in the 6 hall, managers and directors, that do tell me that 7 they encourage their staff to come visit me. And when 8 I hear someone in the hall talking to me and saying, 9 "Well, I don't know if you're confidential, if I can 10 trust that it won't make its way all over the agency," 11 I try to advocate for the office of the ombudsman and 12 encourage them to come visit me, assure them that it 13 is confidential, to the extent that it can be kept 14 confidential in state government. 15 But I won't tell their supervisor if 16 they request that I don't. So I think people do know 17 that, and they've been comfortable coming to me. And 18 I am going to continue to advocate for this role as 19 long as I'm doing this job and also try to advertise, 20 if you will, a little bit in the employee newsletter. 21 And I get up at the all-staff meetings and we talk 22 about that. 23 So I think -- I'm trying very hard to 24 put myself out there and make people aware that this 25 function exists and feel comfortable coming to me. 0035 1 COMMISSIONER CLOWE: Well, I want to use 2 you as my ombudsman this morning, and I want to tell 3 you that I'm not comforted by this survey. It's too 4 general and it's too glossy and it doesn't drill down. 5 And I want you to focus on my behalf -- I hope on the 6 Chairman's behalf -- on the issues that the SAO 7 pointed out to us that we were definitely substandard. 8 MS. HERNANDEZ: Yes. 9 COMMISSIONER CLOWE: And I want you to 10 be an advocate for the Commissioners in that role and 11 keep reminding Director Sadberry and all the other 12 senior managers in this agency, and all of us, that 13 this is an issue that we have to constantly work on. 14 And we are going to improve it and we are going to get 15 better. And the way we're going to do that is through 16 not going to sleep like we did the last time this 17 survey was presented to us. 18 We all thought it was great and, you 19 know, we just sat back and didn't do anything, and 20 then we got a rude awakening. I don't like that, and 21 I don't intend to have it happen again. But we've got 22 the organization, we've got the commitment in place. 23 But it's a living, breathing thing, and we've got to 24 nurture it. 25 MS. HERNANDEZ: Right. 0036 1 COMMISSIONER CLOWE: And you're one of 2 the key players in that. 3 MS. HERNANDEZ: And that's why Janine 4 and I have focused on those areas. And this is a 5 stepping-off point for the agency. We're going to 6 focus on those problem areas or the lower scoring 7 areas and work towards improving those. So we are 8 going to maintain a focus on that and work towards 9 resolving -- hopefully resolving some of the issues or 10 at least getting people to maybe feel more comfortable 11 with the trust issues and the value issues. 12 COMMISSIONER CLOWE: It's a gradual 13 thing. 14 MS. HERNANDEZ: Yes. 15 COMMISSIONER CLOWE: It's an incremental 16 progression thing. You never see how far you've come 17 until you stop and turn around and look back at where 18 you came from. 19 MS. HERNANDEZ: Right. 20 COMMISSIONER CLOWE: Okay, Janine, it's 21 your time now. 22 CHAIRMAN COX: Chairman, may I -- 23 COMMISSIONER CLOWE: Sure. 24 MS. HERNANDEZ: Yes, sir. 25 CHAIRMAN COX: -- follow along with some 0037 1 of those questions that you have asked? 2 Now, how do you understand your 3 relationship to the Commissioners? 4 MS. HERNANDEZ: Well, I report directly 5 to Director Sadberry. But I certainly can bring -- I 6 have open communication with you at any time that I 7 require it. And if I feel I need to bring an issue to 8 either one of you, that I would be free to do so. And 9 Director Sadberry and I have talked about that, and he 10 is in full support of that. 11 CHAIRMAN COX: Okay. Now, you have not, 12 to my recollection, brought anything directly to me. 13 Is that correct? 14 MS. HERNANDEZ: That's correct. 15 CHAIRMAN COX: And have you brought 16 anything directly to Chairman Clowe? 17 MS. HERNANDEZ: No. 18 CHAIRMAN COX: So can we take from that, 19 that every grievance, if you will, that an employee 20 came to you with has been taken care of? 21 MS. HERNANDEZ: Yes. I think that if I 22 were to bring something to either one of you, that I 23 would feel that it was such a major concern that we 24 couldn't handle it without getting input from you. 25 And I think that thus far we've been able to address 0038 1 every situation. There are some cases that are still 2 in progress. 3 I've had 13 cases, and we have three 4 that are open. And they range from employees' 5 perceptions of how they're treated or valued in their 6 work area to policy and procedure items. And most of 7 those things -- or all of those things so far have 8 been -- we have been able to address those and work on 9 those and come together as a team with the employees' 10 management. And so I haven't felt the need to bring 11 an issue before you as of yet. 12 CHAIRMAN COX: Okay. But you are 13 comfortable that if you did have that need, that you 14 would be able to do it and that it would be within 15 your authority -- 16 MS. HERNANDEZ: Yes. 17 CHAIRMAN COX: -- and that everything 18 would be fine that you did that? 19 MS. HERNANDEZ: Yes. I would have no 20 problem bringing an issue to either one of you. 21 CHAIRMAN COX: Now, when you moved into 22 this position, I think it was sort of an emergency, if 23 I remember. The state auditor made the recommendation 24 that we have an ombudsman. And either we, Director 25 Sadberry or the state auditor, or both, felt that was 0039 1 so immediate that we should get someone in that 2 position as soon as we could. 3 MR. SADBERRY: Yes, Chairman. What 4 happened was, we began the process of creating the 5 position and the posting and the interview process. 6 And, actually, it was the Chairman of the House 7 Licensing Committee, as I explained that to him and 8 the delay in the implementation date that we had 9 established on this item for the state auditor's 10 report, that that was not soon enough. 11 And it was actually then the state 12 auditor's office who recommended that we do it -- I 13 won't say ad hoc, but I think it was an ultimate 14 result of it and even suggested that it perhaps could 15 come from the internal auditor's office, which we 16 conferred then with the internal auditor about that. 17 And our team on the state audit's response team 18 internal to the agency, we came up with this process. 19 I want you to know that in accordance 20 with the state auditor's recommendation, this position 21 is currently posted, and I think you have each been 22 individually informed, as I understand. If you have 23 not -- 24 CHAIRMAN COX: I understand that it's 25 posted as a half-time position. 0040 1 MR. SADBERRY: Part time, I believe 2 about half time. And we've looked at that issue as 3 well. We've looked at the results we've gotten to see 4 if we have correctly anticipated the amount of time 5 commitment that should go into this position. 6 CHAIRMAN COX: Thank you. 7 Chairman Clowe, the relationship that we 8 have with the Executive Director is pretty clearly 9 defined. The relationship that we as Commissioners 10 have with the internal auditor is pretty clearly 11 defined. The relationship that we have with our other 12 direct report, the Charitable Bingo Director, is a 13 little less clearly defined but it is understood that 14 that person reports to us and we sign off on the 15 performance evaluations, et cetera. 16 Now, the relationship that the ombudsman 17 has to us is not in law. And if there's a policy, I 18 don't remember reading it. Are you comfortable with 19 the relationship, as Ms. Hernandez explained it to us, 20 or would you prefer that that be more formal and more 21 regular that we receive regular reports from her, not 22 just reports on an exception basis if she considers 23 something to be an exception? 24 COMMISSIONER CLOWE: I think that's an 25 excellent question. And the discussion we've had this 0041 1 morning has clarified in my mind a lot of the issues 2 that I think might have been in anyone's mind about 3 that relationship and about that person's role. 4 At this point, with the answers that she 5 has given us -- and I do want to get back to the HR 6 Director, because I don't put this entire load on the 7 ombudsman's shoulders. I think HR has a great role to 8 play in this. And I want to keep the Executive 9 Director in this mix, because I think that you and I 10 look to him to run this organization on a daily basis. 11 And because we are not here and we are 12 not available on an everyday basis, I'm satisfied with 13 this discussion as a clarification of what is an 14 unstated policy at this point in time. And I would 15 invite you and the Executive Director and anyone else 16 who feels that further clarification or a policy 17 needing to be codified, to tell us that. 18 We're in the early stages of this in my 19 mind. And we have yet to see the kind of results that 20 I hope to see as a result of these efforts. And if 21 you're happy at this point in time, I would like to go 22 forward and maybe review this again in six months and 23 see how we feel about the progress we've made. 24 CHAIRMAN COX: Well, I'm not through 25 yet. 0042 1 COMMISSIONER CLOWE: Okay. 2 CHAIRMAN COX: And I don't want you to 3 be through yet, because I know you want to talk to 4 Ms. Mays about the HR side of this. 5 COMMISSIONER CLOWE: Right. 6 CHAIRMAN COX: I would like to ask 7 Dr. Landuyt a couple of questions. 8 DR. LANDUYT: Certainly. 9 CHAIRMAN COX: One thing I think I heard 10 you say was that you were not aware of the work that 11 the state auditor had done? 12 DR. LANDUYT: I knew they had done a 13 separate assessment, but I did not review their 14 assessments. 15 CHAIRMAN COX: Okay. So what that tells 16 me -- and you correct me if I'm wrong -- was that your 17 survey was done in a vacuum, that it was done without 18 cognizance or of adjustment for the survey that the 19 state auditor had done that is so important to us? 20 DR. LANDUYT: The survey assessment that 21 we offer for the state is standardized for all state 22 agencies, but it does allow for the customization of 23 the additional items to which, from what I understand, 24 that the agency did customize some of those items to 25 address the auditor's concerns. 0043 1 CHAIRMAN COX: So we, being the 2 ombudsman and the HR Director, modified some 3 questions. But your group at The University of Texas 4 didn't do any special modification to take into 5 account the work that the state auditor had done? 6 DR. LANDUYT: That's correct. The 7 benefit of our assessment is, it does allow a 8 comparison across state government. 9 CHAIRMAN COX: Yes. So this is perhaps 10 helpful in what we were trying to do but not designed 11 for that purpose? 12 DR. LANDUYT: Not specifically designed, 13 that's correct. 14 CHAIRMAN COX: Okay. Now, can we go 15 back to the slide that you were showing, the one that 16 had the threes and the fours and the fives -- or not 17 fives but threes and fours on it? 18 There, that one right there. Now, let's 19 just look at team effectiveness, 348. Now, 80 percent 20 of our people responded to this survey. 21 DR. LANDUYT: Correct. 22 CHAIRMAN COX: And the choices they had 23 were, (1) strongly disagree, (2) disagree, (3) don't 24 care one way or the other -- 25 DR. LANDUYT: Right. 0044 1 CHAIRMAN COX: -- (4) agree -- 2 DR. LANDUYT: Agree. 3 CHAIRMAN COX: -- and (5) strongly 4 agree? 5 DR. LANDUYT: That's correct. Or they 6 could mark "Don't Know/Not Applicable." 7 CHAIRMAN COX: Okay. So if they 8 answered, they answered with 1, 2, 3, 4 or 5? 9 DR. LANDUYT: Correct. 10 CHAIRMAN COX: So 3 doesn't mean 11 average. Three means I don't care? 12 DR. LANDUYT: When you look at 13 perceptual surveys, 3, that's correct. 14 CHAIRMAN COX: So what can we conclude 15 from these numbers if 3 means I don't care? 16 DR. LANDUYT: You want numbers close -- 17 you want them closer to 4. When you look at employee 18 perceptional surveys and you look at attitudinal 19 assessments, when you start getting a lot of scores 20 that average around the 4, from anywhere from 350 to 21 450, you start to have what would be a positive 22 perceptual survey. When you get much below 3.5, it 23 starts to tail off from there. 24 CHAIRMAN COX: Okay. So team 25 effectiveness and supervisor effectiveness, those are 0045 1 really marginal scores? We can't look at that and 2 say, "Those are way above average." They're just a 3 little bit above "I don't care." 4 DR. LANDUYT: That's correct. 5 CHAIRMAN COX: Okay. 6 DR. LANDUYT: There is some ambivalence 7 by employees as to how they respond to that. But, you 8 know, when you look at quality, you start to get up 9 about 4, you can feel fairly assured that employees 10 have a positive perception of the quality of services 11 they offer to their customers. 12 CHAIRMAN COX: Okay. So if we look at 13 quality of services and we feel -- our people feel 14 pretty good about that? 15 DR. LANDUYT: Correct. 16 CHAIRMAN COX: But still we don't know, 17 when we look at 404, whether there were a bunch of 18 ones and a bunch of fours or a bunch of twos and a 19 bunch of fives or a bunch of threes? 20 DR. LANDUYT: You do when you -- the 21 data gets broken down in the report. 22 CHAIRMAN COX: You know; you know. 23 DR. LANDUYT: No. The agency gets a 24 report of that as well. 25 MS. HERNANDEZ: I also have that 0046 1 information. 2 CHAIRMAN COX: But Chairman Clowe and I 3 don't know that. So when we look at these numbers, we 4 don't know what 375 means. 5 And, Dale, I'm going to ask you if you 6 will -- and I think we talked a little bit about this 7 yesterday -- to try to put together -- and Janine -- 8 some more detail for us -- 9 MS. HERNANDEZ: Certainly. 10 CHAIRMAN COX: -- that helps us 11 understand, particularly on these key questions, the 12 ones that are closely related to work the state 13 auditor did, what our people really said. 14 MS. HERNANDEZ: Okay. Yes, I will do 15 that. 16 CHAIRMAN COX: Now, Chairman Clowe, one 17 of the things on the table is, let's give our folks a 18 break and not do any more surveys for a while. And, 19 yet, I have a concern that this survey really is not 20 an appropriate follow-up to the one the state auditor 21 did. And I'm concerned about going until 2008-09 22 until we do another one of these. And apparently -- I 23 haven't heard anything about asking the state auditor 24 to come back and do theirs again. I've heard that 25 this has been discussed with them and they're 0047 1 satisfied, I guess. What are your thoughts on that 2 situation? 3 COMMISSIONER CLOWE: Well, I feel 4 exactly as you do. And I think we discussed, when we 5 received the state auditor's survey, with them, them 6 coming back and doing it. And my sense is that they 7 may not be available to do that. But what I would be 8 happier with, if they're not available, is our 9 ombudsman conducting that survey under her auspices. 10 And if it's possible to do that in a 11 professional way so that our employees can be surveyed 12 in that manner, which is more detailed and more 13 precise, and we can have that feedback in a reasonable 14 period of time. And I think, in conversations I've 15 had with both of these individuals, they were going to 16 recommend to us an 18-month period -- for which 17 survey? 18 MS. HERNANDEZ: For the SOE, the Survey 19 of Organizational Excellence. 20 COMMISSIONER CLOWE: Okay. 21 CHAIRMAN COX: This one right here? 22 MS. HERNANDEZ: This one here. 23 COMMISSIONER CLOWE: Okay. As far as 24 I'm concerned, this one, I think the Chairman has just 25 said it doesn't give us what we want. 0048 1 So, Chairman Cox, in answer to your 2 question, I would like to see the drill-down detailed, 3 you know, how you really feel about this organization 4 survey, within a reasonable period of time. And if 5 the SAO can't do it, our ombudsman ought to do it. 6 CHAIRMAN COX: You know, I hear that our 7 people are survey weary; and, yet, I'm very concerned 8 about going further without a follow-up on the work 9 the state auditor did, because that report was 10 serious. It was taken serious by this board. It was 11 taken serious by our oversight committee at the 12 Legislature. 13 And I think it's been long enough since 14 we followed it up. And I think that while our people 15 are tired of surveys, that we need to ask them to help 16 us with this one, because we need their help. We need 17 to know how we're doing on the issues that the state 18 auditor drilled down on with a survey like the state 19 auditor did, hopefully done by the state auditor, that 20 would show us: Have we made progress or not? 21 MS. HERNANDEZ: Okay. 22 CHAIRMAN COX: So, Chairman Clowe, I 23 think I would like to ask Director Sadberry to pursue 24 the thoughts that we've talked about here today and 25 come back to us at the next meeting with a proposal as 0049 1 to how we get that kind of information that we need 2 and he needs. 3 COMMISSIONER CLOWE: Great. I certainly 4 agree. 5 CHAIRMAN COX: Are you ready to go on 6 the HR? 7 COMMISSIONER CLOWE: Yes. 8 CHAIRMAN COX: Okay. 9 COMMISSIONER CLOWE: Okay. Now, Janine, 10 you wanted to say something, and I asked you to hold 11 it. Do you still have it? 12 MS. MAYS: No. 13 (Laughter) 14 Actually, it was addressed. I was just 15 going to reiterate that some of the questions that the 16 SAO brought up and some of the survey questions that 17 address value and trust and communication -- are the 18 employees feeling like they're a value add? Do the 19 employees feel like they are trusted and can be -- are 20 trusted and can trust their managers, those things, 21 communication -- all the things that make you want to 22 stay as an employee and make you want to contribute as 23 an employee were added in the survey. That's what 24 you-all were talking about by adding that piece to the 25 survey. 0050 1 One of the things that Dale and I 2 discussed -- and we also discussed this when we had 3 our meeting with Chris Bailey -- was continuing in the 4 surveys that are up and coming with those same 5 questions, because we discussed the fact that when 6 they came with the survey information that they gave 7 us, along with the surveys that had already been done, 8 that that was a baseline for where we stood then. 9 And potential surveys in the future will 10 really address where we really are. And, like you 11 mentioned, those small increments, where they really 12 are and if they are significant. And whether we 13 choose this survey, this style of a surveyor or using 14 the style that the SAO used, in whatever time frame, 15 '08 or '09, that's really where we're going to see 16 whether or not we're really moving forward. 17 So a lot of discussion was addressed or 18 talked about addressing exactly what you just said, 19 what's there and how can we really see whether or not 20 we're truly moving forward and that, like you 21 mentioned before, that change starts at the top and 22 that we address that with understanding what those 23 issues are and then finding ways to address them, 24 because some of the ways that we've used before have 25 not really given us what we want to see. 0051 1 And we've changed. We have changed, and 2 I think that's a good thing. And, like you said, the 3 change is small. The smallness is a good thing. Is 4 the glass half empty or half full? I choose to see it 5 as half full, because we have moved, and I think 6 that's important to recognize. 7 But those questions that they identified 8 and the questions that we followed up with in the 9 survey address those things that I think are critical: 10 Value add by the employee, trust and communication. 11 And continuing forward with those in future surveys I 12 think will really give us the data that we need and 13 will help us to stay focused on moving forward, not 14 just stand still with where we are, not just settle 15 with what we have. 16 COMMISSIONER CLOWE: Well, that's well 17 said, and I agree with it. I want you to know that I 18 think Chairman Cox and I place a high value on your 19 function in this organization. And we look to you to 20 be an advocate for the philosophy that we're 21 discussing here this morning. And I think you're well 22 qualified to do that. Your time here has demonstrated 23 that you understand what we're talking about and you 24 have the capability to be a major force in this 25 effort. 0052 1 You and Director Sadberry have been here 2 long enough now that if there is a problem here, it's 3 your problem. You get a little time when you come. 4 But now, you know, it's kind of like the second season 5 MS. MAYS: The holiday is over. 6 COMMISSIONER CLOWE: The Cowboys are 7 having their first season. But, you know, that second 8 season is coming now with a new coach. And I can tell 9 you, your Commissioner are serious about this. We 10 want the kind of management -- leadership is a better 11 term -- in this agency that gives the employees a 12 feeling of value, of dignity and respect. 13 And we don't especially want the 14 employees to like you, but we want them to respect 15 you. And that's what a good leader strives for, I 16 think. We don't want you to be popular and constantly 17 sated, but we want your judgments and your actions on 18 a day-to-day basis to be respected because of the 19 fairness that you give those who you touch. 20 And that doesn't apply just to 21 supervisors. It's in an up and down and lateral 22 relationship. That's what your Commissioners are 23 striving for here. And we're not going to go to sleep 24 on this issue. We're not going to be lulled by a 25 generic survey, which we well-qualified this to be. 0053 1 You know, we want to hear about this and we want to 2 see some progress, itty-bitty steps if necessary, but 3 we want to see some progress, and you play a big part 4 in that. 5 MS. MAYS: I agree with that totally. 6 In fact, one of my personal goals, the first thing I 7 think in change is to recognize that there needs to be 8 a change. And the agency has recognized that there 9 needs to be a change. That's the first step. 10 The second step for HR is to strengthen 11 who we have and what functions we're doing, and so 12 that has been my personal goal. The only way that we 13 can help others is for us to get strong. And so one 14 of our focuses in HR has been a customer service 15 approach, opening that door and developing those 16 relationships with both sides, with managers and 17 employees, to find out what the issues are, to give 18 the information that's needed, to give accurate 19 information. I think that's the part that develops 20 the respect, is giving accurate information, which 21 means sometimes that it's not what you want to hear 22 but it's correct and accurate. 23 In fact, I've used the analogy with my 24 staff of a grocery store, that when you go into the 25 same grocery store over and over and you have a bad 0054 1 product, you take that product back and you still come 2 to that grocery store, because you've developed 3 respect and you've developed a rapport with them and 4 you trust that from that point forward that things are 5 going to be okay. 6 Well, people are the same. Managers are 7 the same. HR is the same, that information that is 8 given is good information, accurate information and 9 that we're not going to focus so much on a mistake but 10 we're going to focus on how to fix the mistake: What 11 do we do with the mistake that's made? And how do we 12 move forward from that mistake and then how do we 13 prevent that mistake from occurring? 14 So all of that, I think, helps to 15 develop respect between the managers, between the 16 employees. And I think it helps to develop the 17 rapport needed, the partnership that's needed. And 18 more people coming in and asking those questions and 19 asking for our assistance I think is what helps us to 20 move towards where we need to be. 21 Dale and I have worked very close, and 22 John Shaw and Dale have worked very close to help 23 support the efforts that she's doing, to give her the 24 information. And that's a very delicate relationship 25 as well between HR and the ombudsman, because one 0055 1 needs the other. And the goal -- and I think this is 2 already beginning to happen -- the less business she 3 has, that means the more business we have, that means 4 the more efforts we're making towards giving that 5 information and supporting that group and moving away 6 from hoarding information, but sharing information, 7 because one affects the other. 8 So Dale's efforts and our working 9 together I think is moving us towards that. And the 10 fact that she has less customers now I think is a good 11 indication that we're slowly moving in the right 12 direction. And, like you said, there are baby steps. 13 But at some point in time, I think it's important to 14 recognize and look back at where we are so that we can 15 move forward. And it's a constant assessment. It's 16 not just an assessment you do after a survey. It's a 17 constant ongoing assessment, and that helps to prevent 18 some of the problems later. 19 COMMISSIONER CLOWE: Now, let me get to 20 the bottom line on this whole thing as far as I'm 21 concerned. What we're talking about here is how we 22 treat each other in this agency. And how we treat 23 each other is the way we're going to treat our 24 customers. And if we don't treat our customers with 25 dignity and respect and we're not mindful of what they 0056 1 expect when they spend their dollar or their two 2 dollars or their five dollars, when a dissatisfied 3 customer comes in and give us an issue, if we blow 4 them off and don't respond to them and we're blowing 5 off each other in the work situation, then we're 6 failing in our responsibility to the people of the 7 State of Texas and what we are entrusted with here in 8 this agency. 9 You can't treat your employees badly and 10 not treat your customers badly. And we want to set 11 the culture in place in this agency of treating our 12 employees and treating our customers in the way that 13 they will be delighted and satisfied. That's the 14 business objective of this agency, with fairness, 15 honesty and respect, integrity. It's a culture. And 16 you-all play a big part of that. And if we can infect 17 this agency with that kind of enthusiasm, it will 18 benefit the people of the State of Texas, and it will 19 inure to all of us in a positive way. That's why 20 Chairman Cox and I are so intent on this subject. 21 MS. HERNANDEZ: I would like to add, 22 Commissioner, that I've had a couple of people now 23 that have come to visit me that have expressed a great 24 desire to visit with Director Sadberry, and he's been 25 very open to that, and we have met with those people. 0057 1 And they appreciated that very much. And I know word 2 has gotten around that he is open and he'll listen, so 3 because people have told me that. And I just wanted 4 to share with you that people are seeing the shift 5 there. 6 And I feel very seriously and strongly 7 about what you just said. And I take it all 8 seriously, as I know Director Sadberry does. I take 9 just the chat in the break room at the Coke machine 10 just as seriously as somebody who comes into my office 11 with a more pressing concern to them. So I'm fully 12 committed as long as I'm in this role. And I do 13 believe that Director Sadberry is as well. 14 CHAIRMAN COX: Chairman Clowe, I totally 15 agree with everything you said, and I couldn't say it 16 better. So I'm going to try to add something to it, 17 not change a thing you said. 18 You know, the Texas Lottery is about 19 numbers. I mean, our customers pick numbers to enter 20 our contests. Numbers determine who the winners are. 21 Sales are important because they support education. 22 We've got a lot of people here who are really good 23 with numbers. But what we're talking about here, how 24 our people are treated and how they regard this 25 organization, isn't about numbers, because if one of 0058 1 them is being treated unfairly, I'm unhappy. 2 And it's your job, Dale, and it's your 3 job, Janine, to be sure that when we're looking at HR 4 matters, we're not looking at numbers, we're looking 5 at faces and people and we're treating every one of 6 them fairly. 7 MS. MAYS: I agree with that. 8 CHAIRMAN COX: Okay. 9 MS. HERNANDEZ: As do I. 10 CHAIRMAN COX: Anything else on this 11 one? 12 COMMISSIONER CLOWE: I think we've beat 13 this one up pretty good. 14 (Laughter) 15 CHAIRMAN COX: Director Sadberry, do you 16 have anything you would like to add to that? 17 MR. SADBERRY: Well, I want to thank you 18 for the discussion, because it's very helpful to my 19 office and it's consistent with what we are striving 20 to achieve. The one thing -- and I will come back, as 21 requested, at the next meeting with the role issue 22 with the ombudsman. 23 I did share with you, I think, two 24 specific cases that I thought were both remarkable and 25 indicative of the work of the ombudsman's office. I 0059 1 did that informally with each of you so that you would 2 have some idea of her involvement in that, which I 3 think is a good reflection of the effective work that 4 has been done from that office. And I have visited 5 personally with the state auditor and thanked him for 6 that recommendation, because I think that's one of the 7 best things that I've seen done with the agency, is to 8 have a creation and the implementation of the very 9 effective ombudsman role and position. And we'll 10 speak to that more specifically at the next meeting, 11 as requested. 12 CHAIRMAN COX: Mr. Landuyt, thank you 13 very much for your report. We appreciate it. 14 Dale and Janine, thank you very much. 15 MS. HERNANDEZ: Thank you. 16 DR. LANDUYT: Thank you. 17 CHAIRMAN COX: Chairman Clowe, with your 18 permission, I would like to take Item XX out of order. 19 COMMISSIONER CLOWE: Yes, sir. 20 AGENDA ITEM NO. XX 21 CHAIRMAN COX: Okay. Item XX, report, 22 possible discussion and/or action on GTECH 23 Corporation. 24 Director Sadberry. 25 MR. SADBERRY: Chairman, Commissioner, 0060 1 Mr. Turner, Mr. Bruce Turner is present this morning, 2 at our request. You might recall that he had agreed 3 to be present at our March meeting and made 4 arrangements for that. That meeting date was changed 5 at my request, because of a conflict in my schedule, 6 which made him unavailable for that meeting. 7 But he is here today, and we appreciate 8 that. If it is consistent with your wishes, I would 9 like to ask if he may come forward to see if he has 10 any matter or presentation to the Commission. And I'm 11 certain that you will have questions of matters that 12 you wish to discuss within him, and I'm sure that he 13 would be willing and prepared to do that. 14 CHAIRMAN COX: Please. 15 MR. TURNER: Thank you, Director 16 Sadberry. For the record, my name is Bruce Turner. I 17 am the CEO of GTECH and the CEO of Gruppo Lottomatica. 18 Mr. Chairman, I have a short prepared 19 statement that reviews some highlights since our last 20 formal visit. And if that meets with your approval, 21 I'll proceed to do that. 22 Certainly thank you for the opportunity 23 to visit with you formally again. Obviously, this is 24 an important relationship for my company. And I 25 wanted to provide you with some recent updates on 0061 1 developments of GTECH since our last formal visit and 2 give you what I would call, to use your words in a 3 former meeting, a partner's perspective on how we're 4 doing and so some of the developments that are of 5 particular interest and note to you. 6 I certainly think of our relationship as 7 a partnership. Obviously, we are aligned around a 8 common goal, to optimize revenues for education in the 9 State of Texas, and I can think of no more noble goal 10 for our joint organizations to pursue. 11 Obviously, as we have discussed in the 12 past and I've discussed with Director Sadberry, it is 13 my intention to visit with you periodically in this 14 session, at whatever interval you find appropriate, to 15 update you further on whatever developments we may 16 have on a worldwide basis. 17 There have been some exciting 18 developments in my company since my last visit, and I 19 wanted to highlight some of those. Feel free, 20 obviously, to interrupt me at any time if you have 21 questions based on something I've said, and I would be 22 happy to address those then or at the conclusion of my 23 prepared remarks. 24 I would like to begin with an overview 25 of activities surrounding our global compliance and 0062 1 governance system, which I gave you highlights on what 2 our expectations were prior to closing. Now that 3 we're just about seven months into our new family, if 4 I were to call it that, I can give you some highlights 5 on exactly where we stand, which is responsive to your 6 request in our last meeting. 7 It was the intent of Lottomatica to 8 invite members of the GTECH board of directors to join 9 the board of directors of Lottomatica. That has 10 indeed happened. Today the Lottomatica board of 11 directors consists of 13 business professionals, 12 including a majority of directors who are not 13 affiliated with Lottomatica's controlling shareholder, 14 the De Agostini Group. 15 As a refresher, you may recall that the 16 De Agostini Group is a 100-year-old family-controlled 17 company that is one of the largest diversified 18 conglomerates in Europe and has a very successful 19 track record. 20 The board also includes four directors 21 that, as I indicated, served up to the merger closing 22 on the GTECH board of directors. Those include 23 myself, of course, as the CEO of the company. They 24 also include our Vice Chairman for Lottomatica, Bob 25 Dewey. Bob is the former Chairman of the board of 0063 1 GTECH Holdings, and Bob made most of his business 2 professional life in the highly regulated securities 3 industry, as ultimately the head of Investment Banking 4 and Capital markets for a major U.S. brokerage firm. 5 We also have -- and this is consistent 6 with our goal of trying to find sitting chief 7 executives to sit on the board to balance other 8 professionals, so that they can indeed provide 9 guidance, counsel and input on a realtime basis to me. 10 We have Jim McCann on the board. He was a GTECH board 11 member. He is the CEO OF 1-800 Flowers.com, a very 12 successful entrepreneur of a U.S. public company. 13 We also have on the board Tony Ruys, who 14 is the former CEO of the Heineken Group and is now 15 retired. He was also a member for many, many years of 16 the GTECH Holdings Corp. board 17 In addition to these board members, we 18 also have serving as a consultant to the Lottomatica 19 board Sir Jeremy Hanley. Sir Jeremy Hanley was a 20 member of GTECH's board, was head of our Audit 21 Committee, is a chartered accountant in the United 22 Kingdom. He is currently serving in the capacity of 23 consultant to the board. He actually -- and 24 consultant to the Audit and Compliance Committee. And 25 he serves in an oversight capacity, also reporting in 0064 1 to the regulator in the United Kingdom as necessary on 2 a regular basis and attends all board meetings in an 3 observer status. 4 We have formed a Compensation Committee 5 in the board, composed exclusively of independent 6 directors. We have adopted revised provisions for 7 that group. And both Jim McCann and Bob Dewey, former 8 GTECH board members, also serve on the Compensation 9 Committee. Gianmario Tondato, the CEO of Autogrill, 10 which is a major contract food services organization 11 in Europe, is the Chairman of that committee. 12 We have expanded the role of the Audit 13 Committee to include compliance oversight activities. 14 That also consists of a majority of independent 15 directors. And, as I noted, Sir Jeremy Hanley serves 16 as a consultant to that board, participates in all of 17 those committee meetings and board meetings. 18 I should point out that Severino 19 Salvemini, who is a well-recognized Professor of 20 Business Management and Economics in Italy at the 21 University of Milan, is the Chairman of that 22 particular committee. We report out to that committee 23 on a regular basis on issues both of audit and issues 24 of sensitivity in terms of governance that may be of 25 interest to the broader board. 0065 1 The Lottomatica board recently adopted 2 the latest version of the Corporate Governance Code 3 which has been commissioned by Borsa Italiana, which 4 is the Italian equivalent of the United States 5 Securities and Exchange Commission, as a standard for 6 publicly listed companies in Italy. It is actually 7 modeled quite closely after the requirements that were 8 implemented after the passage of Sarbanes-Oxley in the 9 United States. So the universe in the world is 10 becoming a smaller place all the time. 11 It addresses a range of corporate 12 governance practices, many of which Lottomatica had 13 already embraced prior to the combination of our 14 companies, and those include things such as the size 15 of the board, its independence, having lead 16 independent directors, internal controls, related- 17 party transactions and the like. Lottomatica is an 18 early adopter of this code, which at the present time 19 in Italy is voluntary. 20 The Lottomatica board is also 21 considering, at our recommendation, a number of 22 specific best practices, mirrored more on the practice 23 and experience that we had as a U.S. public company, 24 based on our expertise, that we think will further 25 strengthen and enhance transparency and visibility at 0066 1 the board of directors' level over all aspects of a 2 growing global business. That's something I believe 3 is important and I think it's absolutely critical that 4 they understand that. And we have been acclimating 5 the newer board members, newer to that approach, to 6 that in the last several meetings. Our next regularly 7 scheduled board meeting is just in a couple of weeks 8 where we will further talk about some of these things. 9 By way of perspective, obviously, when 10 our transaction closed at the end of August of last 11 year, GTECH had already established itself as a 12 leading provider of gaming services in the world and 13 as one of the foremost experts in compliance and 14 governance, and we had been recognized externally by 15 HVS Consulting in that regard on more than one 16 occasions. 17 Since that time we have been assessing 18 all aspects of the global program, seeking to 19 harmonize all of our programs around the world so that 20 we maintain the same standards that we established 21 prior to the combination of our companies. I'll 22 highlight a couple of those that are significant. 23 Obviously, many of these have been shared in detail 24 with the staff and will continue to be shared in 25 detail with the staff and Director Sadberry and then, 0067 1 obviously, you as well. 2 I'm certain you have all seen -- and I 3 think we talked about this at the last meeting I had 4 with you -- GTECH Code of Conduct. We are now in the 5 process of completing an integrated Code of Conduct, 6 largely based on the GTECH Code of Conduct. And that 7 has been developed, and we will put that before the 8 Lottomatica board of directors for their approval in a 9 couple of weeks. 10 I should note that they have spoken 11 enthusiastically about adopting that code and they 12 understand its importance. We are one of the most 13 highly regulated companies in the lottery business, 14 more so than our competitors, because of our strategic 15 direction that further expands our scope and presence 16 in the commercial gaming business. 17 We are actively under evaluation for 18 commercial gaming licensing in jurisdictions 19 worldwide. That will be necessary to close our 20 pending acquisition of Atronic International. And we 21 would expect that that licensing activity which as, 22 Chairman Cox, your own personal experience, you know, 23 is quite rigorous, we would expect to have that 24 completed by year end. 25 As we all recognize, the Code of Conduct 0068 1 is about a set of words. It's all about 2 implementation of that and understanding, across 3 cultures and across markets, so that people who 4 ultimately execute the business day-to-day understand 5 the different between right and wrong 6 Both Lottomatica and GTECH have 7 instituted and undertaken Code of Conduct training 8 programs. And after we launch the new code, we will 9 further supplement that on a worldwide basis. Again, 10 it focuses on people, and it is on understanding the 11 implications in a dynamic marketplace of the 12 requirements of our basic business day-to-day. 13 An annual certification process will be 14 extended, once we have launched this code, for all 15 employees worldwide. Currently it covers all GTECH 16 employees worldwide. So we will, as part of Gruppo 17 Lottomatica, our employees in Italy will adopt the 18 same standards of, in essence, reporting an 19 acknowledgment of receipt, training. 20 And we actually have a training program 21 that allows us to demonstrate their understanding. 22 All employees of the company, including myself, must 23 be certified annually. We go through a short training 24 program every year that's done on line. It requires 25 you to address a series of questions that you must be 0069 1 able to address correctly. And that, in essence, 2 gives us some immediate feedback on whether our 3 employees acknowledge and understand, base on real 4 life scenarios, the implications of what we do. 5 To be effective -- and this would be 6 true for any organization anywhere in the world -- 7 compliance programs must empower individual employees 8 to act and to understand, to appreciate and to act if 9 they sense any potential area of risk. In most 10 situations around the world, most problems can be 11 avoided if people simply understand what oftentimes 12 may be nothing more than that initial unsettling 13 feeling in your tummy that says, "Maybe this isn't 14 right." If you can sensitize them to that, in all 15 probability you will avoid problems before they 16 actually become problems. 17 While that can be a daunting task to 18 ingrain in people that understanding, it is our goal 19 and objective, in terms of our awareness, our training 20 programs worldwide, to ensure that we always have that 21 type of mind. To increase the accessibility and reach 22 of the compliance officer, which is our chief 23 administrative officer of the company, Walter DeSocio, 24 who is seated over here. 25 We also have in the past engaged a 0070 1 third-party vendor to operate an integrity line, to in 2 essence field anonymous calls from all over the 3 world -- it's commonly called a whistleblower 4 number -- that would independently, confidentially and 5 anonymously, if preferred, allow people to report any 6 issues or concerns. 7 That vendor has extended their 8 capabilities and will do so in multiple languages, 9 including Italian. And that line is operative, and 10 information has been provided to our employees 11 worldwide on its access and use. 12 To provide transparency to the board of 13 directors, feedback that comes through multiple 14 sources -- and one of those sources is the one I just 15 mentioned -- is reported to the Audit and Compliance 16 Committee of the board of directors of the company on 17 a regular basis. We believe that's very important, 18 that they have transparency around any issues, you 19 know. What we find in terms of the various mechanisms 20 we have, most of the calls -- the lion's share, 21 candidly -- tend to be HR related. Nonetheless, it 22 tells us that people understand that this feedback 23 loop can be used and it is used. And we always make 24 sure we follow up all of those areas. And the 25 visibility on all of those areas is provided to the 0071 1 board of directors. 2 Consistent with this past practice, the 3 Lottomatica Board, as I just said, is actively 4 involved in understanding these and will continue to 5 be in a formal reporting mechanism on a regular basis. 6 As has been discussed here with you in 7 the past, we have historically provided comprehensive 8 oversight of identification and engagement of 9 government relations consultants through a formalized 10 process that is managed by our Government Affairs 11 Committee. It has board of directors' involvement at 12 certain threshhold levels which we have briefed you on 13 in the past. Those practices continue to this day. 14 That system includes extensive 15 background checks, certifications, contract terms and 16 conditions and monitoring of various activities, 17 including expenses, reimbursements and business 18 practices. That system will continue to remain in 19 place. 20 The Government Affairs Committee has 21 been enlarged to include senior management 22 representatives across the combined business. Simply 23 translated, we have ensured that representatives from 24 Italy are involved in that process, and we are 25 sensitizing them to the requirements of our global 0072 1 enterprise so that they fully understand all of those 2 elements that are critical, and that includes the area 3 of government relations consultants. Obviously, we 4 have reported to Director Sadberry and his staff, on a 5 monthly basis, our activities around the consultants 6 In addition to that committee, our 7 business requires the creation of additional oversight 8 bodies. This is particularly important as we are 9 poised on the threshhold of approval of licensing in 10 key U.S. gaming markets, including the state of 11 Nevada, the state of New Jersey, Colorado, Mississippi 12 and many, many others. 13 Due to the requirements of these 14 commercial gaming jurisdictions, we have to add 15 another layer in many parts of the world. And we will 16 present, at our board meeting in a few weeks for their 17 consideration, a proposed global compliance and 18 governance committee that has been expanded. It will 19 include five members, and that will include business 20 professionals in gaming and lottery that are qualified 21 to present the business at this time and going 22 forward. That committee will be accountable to both 23 myself and to the Chairman of the Board of Directors 24 and the independent members of the board as well. 25 The board will be asked to consider 0073 1 approving that new program, and it will consist of the 2 following elements: We well have three senior 3 executives on that board and two outside independent 4 board members as well, so that we have on a day-to-day 5 basis, because as you know, in areas of sensitive 6 compliance, that usually requires some level of 7 discussion and interaction so that you understand 8 exactly what's going on. 9 We will have one outside gaming counsel 10 and one other experienced gaming industry executive on 11 that board. Actually, is mirrored after the 12 requirements in the State of Nevada that have been 13 honed over many, many decades. The committee will 14 meet at least quarterly. There will be a formal 15 agenda, and all relevant compliance matters will be 16 reviewed by that organization. 17 Other key areas of the committee include 18 the approval of vendors, background investigation for 19 vendors and possible partners, investigation of merger 20 and acquisition targets and potential joint venture 21 partners and oversight of Government Affairs Committee 22 matters, including engagement of consultants, 23 political and charitable contributions. This added 24 level of compliance, which is a requirement of many 25 commercial gaming licenses, will position us at the 0074 1 forefront of governance and compliance in our industry 2 worldwide. 3 Finally, we're in the final stages of 4 completing our review and implementation of a number 5 of other policies and procedures, including privacy, 6 e-mail, records retention. And we will have these 7 policies and procedures in place on a worldwide basis 8 and posted on our corporate website both for Gruppo 9 Lottomatica and for GTECH in the coming weeks 10 As I committed to you in my last visit 11 with the Commission, corporate governance and 12 compliance matters are areas of continuous 13 improvement. It is not something that you can look at 14 numbers and expect that you're done and you're 15 satisfied. It requires constant vigilance, constantly 16 highlighting those employees worldwide and listening 17 very carefully around the world. 18 One of the most important practices that 19 I personally perform in that regard is simply called 20 by many management by wandering around. I do it 21 often, and I do it worldwide. There is no better form 22 of feedback than sitting down very casually and openly 23 with the people that drive our business worldwide and 24 giving them an opportunity to share. And they always 25 do around the world. Part of good governance and good 0075 1 management and leadership, candidly, is building those 2 bridges around the world so that everyone understands 3 what's right and they know very simply if they need to 4 pick up the phone and call anyone, including myself, 5 they may do so. And that happens, and that's a good 6 mark in our book. 7 We have made substantial progress in 8 integrating our two companies since our closing, and 9 we've made substantial progress in a variety of other 10 areas designed to help all of our customers worldwide, 11 and the Texas lottery as well, improve the 12 responsiveness of our business, our content and our 13 products such that they can help you achieve your 14 critical mission of optimizing money for good causes. 15 Obviously, many members of my staff have visited with 16 the Texas Lottery staff. I have visited myself as 17 well, and that will continue. 18 Let me highlight a couple of those 19 business applications which I think in general terms 20 are beneficial to how we help position the Texas 21 Lottery and all of our customers worldwide for 22 continued success. 23 We have a major commitment in the retail 24 environment. Obviously, today in the United States, 25 the core retailer is the guts of our interface, the 0076 1 primary face to our end users and players. Obviously, 2 assisting in that strategy is critical and leveraging 3 our national scale is important. 4 Optimizing retailer penetration with 5 best-trade practices -- and we've shared many of those 6 with you and the staff. Mr. Chairman, I believe you 7 were part of some of those meetings as well -- 8 expanding retailer distribution;, obviously, something 9 we're looking at worldwide, but you can't sell 10 products to consumers if you don't touch those 11 consumers conveniently -- and that's all about retail 12 distribution and trade styles -- and ensuring you have 13 sufficient density to meet the changing demographics 14 of any marketplace. We have created new products 15 along those lines to help improve that, and we have 16 presented those products to the Texas Lottery staff 17 for their evaluation in the future. 18 We are also making a very concerted 19 effort to bring our national and international scale 20 to bear with major chain retailers which historically 21 have been more difficult for many of our customers to 22 penetrate. And I would expect that through a variety 23 of test activities we're doing now, that we will be 24 able to help all of our customers by acclimating those 25 major chains to not only the basic lottery products 0077 1 that our customers offer today but also some of the 2 service and delivery techniques that may make that 3 business a little bit more palatable to them in the 4 future. 5 We have several pilots underway today 6 using self-service technology, which is increasingly 7 important in the marketplace. For example, in 8 California, the lottery is using a completely 9 different business model with pilots such as CVS, the 10 major drugstore retailer, and their pharmacy product 11 in using our lottery-to-go product. We are using 12 instant to-go product in both Louisiana and Florida in 13 pilots, and we will deploy our instant showcase 14 product in Massachusetts in the very near term. All 15 of these products are available at the present time. 16 Many are on the product road map for the State of 17 Texas already, as a result of our contract discussions 18 within the last 12 months. 19 Further, there is a trend in retail 20 because of the major churn that those chain accounts 21 have in their levels of employment. It's not uncommon 22 for chain retailers to have, particularly the 23 convenience level, 50 to 100 percent turnover a year. 24 That's a tough market to run, a tough market to keep 25 people trained in. Obviously, reducing labor, 0078 1 increasing simplicity is critical for that, absolutely 2 essential for the "Big Box" retailers that are still a 3 part of our future market focus. 4 We have also, to supplement that 5 positioning, made further commitments to research and 6 development on behalf of all of our customers around 7 the world. That's part of our research and 8 development tool kit, to provide better analytics 9 around products, consumers' desires, trends and 10 applications, so that as we design individual products 11 to meet the needs of our customers, whether they be in 12 regional or international markets, that we're ready to 13 do so based on what the end-using public demands. 14 The objective of all of these activities 15 is to anticipate the future needs of the marketplace. 16 One of the biggest challenges that I have overseeing 17 our global company is to try to anticipate your needs 18 by five years, such that when you are ready for those 19 solutions, if they meet the social and political 20 requirements of your marketplace, we aren't beginning 21 to design those; we have indeed perfected those, and 22 that requires us to look on an international scale. 23 The timing of various initiatives we 24 have today -- and you will see announcements coming in 25 the near to intermediate future in that regard -- is 0079 1 such that we expect to have incremental products and 2 services ready for all of our international 3 marketplaces and for the Texas Lottery at the 4 appropriate time in the future. 5 We also have developed a worldwide 6 lottery marketing database to help us better 7 understand the numbers but also the trends and what 8 underlies the trends so that we can deploy products 9 and services to help our customers drive their 10 business more effectively. 11 We've also, since our last meeting, done 12 some strategic activity, and we have more on the way. 13 We recently completed the acquisition of Creative 14 Games International, a well-recognized, high quality 15 instant ticket printer. This was our initial entry 16 into the instant ticket printing business. 17 And it is our intention over time, by 18 winning the trust and confidence of our customers 19 worldwide, to make a major step into that area and 20 increase market share dramatically. CGI is our first 21 step in that particular space; it is not our last. So 22 you can expect, that opportunity permitting, we well 23 seek to acquire incremental capability in that space, 24 and we've made that intention publicly known. 25 We are also embracing new strategic 0080 1 partners with a particular focus on how do we create 2 engaging content that helps our customers drive their 3 business and optimize their results? That has 4 included alliances with various companies, including 5 Innoka and Ingenio in the international markets, 6 Endymol, the major brand company, Tournament One, 7 Walker Digital, GameLogic. That list will continue to 8 grow over time. All of those focused on bringing new 9 content and new ways that can touch our customers 10 worldwide. The results of that over time will flow 11 through in different ways and different shapes to all 12 of our customers. 13 Finally, I should say our colleagues at 14 Lottomatica have undertaken continued development of a 15 broad corporate social responsibility program and 16 responsible gaming at its core increasingly on a 17 worldwide basis. That area is of great interest to 18 all of our customers as we seek to ensure that we 19 develop products and solutions that meet the political 20 and social requirements of a discerning marketplace 21 and at the time ensure -- at the same time ensure that 22 we meet the needs of responsible gaming worldwide. 23 Included in that program will be continued development 24 of products and services that allow us to optimize the 25 way we deliver products and how they respond to the 0081 1 consuming public. 2 So at a high level, those are my update 3 comments. I can certainly tell you that the first 4 seven months of the new GTECH, so to speak, or as part 5 of Gruppo Lottomatica has been energizing and it has 6 been engaging, and it certainly is one that we're all 7 excited about, both today and in the future. 8 I would be happy to take any questions 9 that you may have. 10 CHAIRMAN COX: Chairman Clowe, 11 consistent with my commitment to the Court Reporter, I 12 think we ought to take about a 15-minute break right 13 now. 14 And, Mr. Turner, if you will resume that 15 position when we get back, we'll have a chat. 16 MR. TURNER: I will do so, sir. 17 CHAIRMAN COX: Thank you. 18 (Off the record: 10:38 a.m. to 10:52 19 a.m.) 20 CHAIRMAN COX: Can we come back to 21 order, please. 22 Can we come back to order, please. 23 Mr. Turner, thank you for those remarks. 24 MR. TURNER: Yes, sir. 25 CHAIRMAN COX: Chairman Clowe, do you 0082 1 have anything you would like to talk about? 2 COMMISSIONER CLOWE: I would also like 3 to thank you, Mr. Turner, for your thoughtful and 4 detailed presentation. I do have a few questions. 5 I don't believe you mentioned -- there 6 are 13 members of the board, but I don't believe you 7 mentioned who the Chair is. 8 MR. TURNER: The Chairman of the Board 9 is Lorenzo Pellicioli, who both of you have met in the 10 past. 11 COMMISSIONER CLOWE: Right. And I think 12 that you indicated that of the 13 members, a majority 13 are non-control group members. Is that correct? 14 MR. TURNER: That is correct. 15 COMMISSIONER CLOWE: And how many of the 16 13, then, are what we would identify as outside or 17 independent or non-employee directors? 18 MR. TURNER: Well, if I may, let me 19 just -- I'll mention their names. Now, please excuse 20 me. There are lots of vowels in the Italian names, 21 and I'll probably get these wrong, but I can mention 22 briefly what they do. 23 The independent members of the board 24 today are Rosario Bifulco. He was the former CEO of 25 Lottomatica. And, obviously, I assumed that position 0083 1 and he departed, but he continues. 2 Gianmario Tondato. He is the CEO of 3 Autogrill, a very large contract food services 4 organization in Italy. He is also head of the 5 Compensation Committee. I find him to be quite a 6 valuable resource because we deal with some of the 7 same things day-to-day. 8 Severino Salvemini is the head of the 9 Audit Committee. He is the individual that is a 10 Professor of Business and Management at the University 11 of Milan. 12 Paolo Ainio is the CEO of Media Plus, 13 which is a major media and communications company in 14 Italy. 15 Bob Dewey, obviously, you know. Bob 16 Dewey is the Vice Chairman of the board and the former 17 Chairman of the Board of GTECH. 18 Tony Ruys, former CEO of Heineken. 19 Jim McCann, CE0 of 1-800 Flowers. The 20 individuals I just highlighted are all of the 21 independent directors of the company. 22 COMMISSIONER CLOWE: And if I correctly 23 totaled that up, it would be six individuals? 24 MR. TURNER: That's correct, sir. 25 COMMISSIONER CLOWE: Earlier this 0084 1 morning I had the opportunity to sit in on a briefing 2 that our General Counsel -- 3 MR. TURNER: Excuse me. It's seven. 4 COMMISSIONER CLOWE: Is it seven? 5 MR. TURNER: I quickly get seven. 6 COMMISSIONER CLOWE: I got lost in the 7 vowels there. 8 MR. TURNER: I do, too. 9 COMMISSIONER CLOWE: So there are seven, 10 and that's the majority of the board? 11 MR. TURNER: Yes, sir, that's correct. 12 COMMISSIONER CLOWE: Earlier this 13 morning, as I said, I sat in on a briefing that our 14 General Counsel here gave the Executive Director on 15 her meeting with the General Counsel of your company 16 yesterday. And they covered in their discussion and 17 she covered in her report a number of items which I 18 think are of interest to this Commission. 19 I don't know, Mr. Chairman, whether you 20 had that briefing or not. But it answered some of the 21 questions I had relative to some of the issues that 22 were raised in the Department of Public Safety 23 investigation earlier about this merger, Trinidad, 24 Tobago and Brazil and some issues like that. 25 I don't know whether -- I think you have 0085 1 met with the Chairman. I don't want to be redundant 2 about those issues and the actions which have taken 3 place. 4 But, Mr. Chairman, what would your 5 pleasure be in regard to that type of questioning? 6 CHAIRMAN COX: I would like for you to 7 go wherever you want to. 8 COMMISSIONER CLOWE: Okay. Well, would 9 you like to cover those issues which were sort of, I 10 might term open-ended relative to some of the concerns 11 this board had at that time? 12 MR. TURNER: Yes, sir; yes, sir. There 13 are four specific issues that DPS identified as areas 14 of concern. The first of those -- and these are in no 15 particular order. The first of those was Brazil. As 16 I indicated to you at our last visit, we were in the 17 process of terminating our business in Brazil. At 18 that time I indicated that I expected we would have a 19 residual piece of small business for a state lottery 20 in Brazil. That has since been terminated as well. 21 So today all of our employees in Brazil 22 have been terminated, with the exception of a very 23 small number, less than 10, that are serving in 24 essence the final disposition of equipment. And I 25 would imagine that we will continue to have legal 0086 1 activity in Brazil probably for the next decade. 2 We've been advised that that type of activity takes 3 about that long in Brazil. 4 The legal activity still; surrounds the 5 hold-back of monies that we believe are due to us. 6 The courts had released most of that but had kept some 7 in reserve. And we would expect that we will 8 ultimately resolve those issues since then. 9 Otherwise, there has been no -- there really is no 10 meaningful activity in Brazil at this time, and there 11 is no continuing activity surrounding Brazil that I'm 12 aware of -- and Walter, please confirm this -- with 13 the United States Securities and Exchange Commission 14 at this time. 15 COMMISSIONER CLOWE: And no legal action 16 that you're aware of? 17 MR. TURNER: None outside of the scope, 18 sir, that I just mentioned? Is that -- Walt? 19 MR. DeSOCIO: That's correct. 20 MR. TURNER: Okay. I was looking to 21 Walter just to make sure. 22 The second area of interest was in 23 Trinidad and Tobago. The current status of Trinidad 24 and Tobago is that we are continuing to work with the 25 government. I recently was in Port of Spain in 0087 1 Trinidad and had a meeting with our customer and one 2 of the top executives in government, the Minister of 3 Finance himself, and I was told personally at that 4 time that they apologized for the behavior of past 5 political leaders in their country and they did not 6 hold us responsible for their actions and that they 7 would like our continued assistance in possibly 8 pursuing those individuals for bringing harm to the 9 government, and we have committed to do so. Outside 10 of that, there is no further activity in Trinidad. We 11 actually recently instituted a contract extension in 12 that marketplace for another five years. The SEC as 13 well had reviewed that situation, and it is my 14 knowledge at this point that they have had no further 15 activity on that front. 16 The third area that had been brought up 17 last year was in the Chec Republic. I'm pleased to 18 report to you that that surrounded a loan that we made 19 to support the business development activities o 20 SAZKA, who is our customer in the Chec Republic, who 21 is owned by an organization of sports-related bodies, 22 and they were building an arena. The second tranche 23 of repayment of that loan, $8 million, was repaid 24 exactly as it was expected to on January 1st of this 25 year. 0088 1 That loan now has a $4 million residual. 2 They have repaid $16 million on time and on budget, as 3 they expect to. Their arena is performing quite well, 4 and we have an excellent relationship with that 5 customer. The final payments for that will come in 6 annual tranches over the next couple of years, but the 7 bulk of it has been repaid as expected. 8 The final area that had been highlighted 9 specifically was Poland. And some consulting 10 arrangements we have had in Poland, as we have 11 informed Director Sadberry and the staff, we have 12 terminated the consulting arrangements with Dr. Blass 13 and more recently with two other individuals that had 14 been associated with Dr. Blass. And at the present 15 time, we have no consulting activity in Poland 16 whatsoever. 17 Those, sir, I believe were the four 18 specific items the DPS had highlighted. And I think 19 that provides a comprehensive update, unless you have 20 further questions. 21 COMMISSIONER CLOWE: Is there anything 22 else along those lines that has occurred that we're 23 not aware of at this time that you would like to 24 cover? 25 MR. TURNER: No, sir, there is not. 0089 1 COMMISSIONER CLOWE: In addition to 2 yourself -- and you have been here and you've spent 3 time dealing with this agency, and you're on the 4 board -- is there anybody else on the board who has an 5 understanding of what we're doing in Texas and the 6 peculiarities of this operation? 7 MR. TURNER: Well, Commissioner Clowe, 8 there is no one else that has my level of direct 9 understanding, obviously, because there is no one else 10 who has visited with the same frequency and who deals 11 with this same issues day-to-day. 12 However, we do -- obviously, we run 13 through our Italian operation the largest commercial 14 lottery in the world. We deal with a regulatory 15 situation in Italy that's not unlike Texas in that in 16 the range of services provided by the vendor community 17 vis-a-vis the roles and responsibilities of the 18 regulator. 19 So our Italian colleagues are quite 20 sensitive to the kinds of issues that you would be 21 most sensitive to that I am, and those deals with 22 issues of integrity, issues of transparency and 23 anything that could go to the core body of what 24 provides the background and strength to the lottery. 25 And we have that level of expertise. 0090 1 And, obviously, we have several 2 directors who have been with GTECH, and now 3 Lottomatica, for many years. They have been exposed 4 on a global scale to the type of issues that all 5 organizations around the world are sensitive to. So I 6 think we have a board that has a very good knowledge 7 base for the kinds of issues that are sensitive. 8 Obviously, all of our board members are 9 undergoing the very rigorous licensing scrutiny of 10 commercial gaming jurisdictions worldwide, which is 11 quite similar to the licensing scrutiny and evaluation 12 performed by the Department of Public Safety under 13 your oversight. So I think that we have a level of 14 sensitivity. I would be the only one with the 15 day-to-day knowledge, given my more frequent 16 interaction with you. 17 COMMISSIONER CLOWE: This last meeting, 18 Chairman Cox and I discussed at some length with our 19 staff the reality of the leveling, if not reduction, 20 of take to the State of Texas as a result of lottery 21 activities, and that discussion covered the status of 22 the on-line games and then the situation regarding the 23 instant scratch-off tickets. 24 MR. TURNER: Yes, sir. 25 COMMISSIONER CLOWE: And I assume that 0091 1 you're aware of what our situation is in regard to 2 that issue. And I would invite you at this time, if 3 you have a comment for us, to give us any observation 4 you might have in that regard. 5 MR. TURNER: Certainty. The -- and I'll 6 call it a predicament -- but the predicament that the 7 State of Texas faces is not dissimilar to the same -- 8 candidly, the same kinds of issues that others are 9 dealing with worldwide. 10 For example, I will leave here this 11 afternoon and go to the State of Georgia to address 12 the Georgia Lottery Board on exactly this issue, and 13 that is that in the United States, revenue growth to 14 good causes has been slowing and in some cases 15 declining modestly. And the mix of games has 16 continued to shift more and more towards instant 17 tickets. 18 Actually, in the United States. 19 72 percent of sales come from instant tickets today, 20 with much higher prize payouts. You would contrast 21 that -- for instance, in Europe, it's exactly the 22 opposite. In Europe, generally speaking, instant 23 tickets, with only a couple of exceptions, are much 24 lower. 25 The challenge and the predicament is 0092 1 that part of the reason for the drive in that 2 direction by many of our customers in trying to find 3 the appropriate balance is the move by the consumer 4 towards a desire for more immediate gratification. 5 And that -- obviously, we now dealing with generations 6 that have grown up on computers from the time they 7 were born and grown up on an entertainment platform 8 that is more immediate than certainly the ones that we 9 or our children have necessarily grown up with. 10 The challenges that we are trying to 11 address with our customers are how -- knowing the 12 political and social constraints that we all share in 13 the United States at least equally, how can we bring 14 that into balance, knowing that we do not have 15 unlimited constraint or flexibility in the instant 16 side to grow at whatever rate we deem reasonable? And 17 usually that's a political constraint, that you're 18 suddenly growing too quickly. 19 We have a number of initiatives. I know 20 my staff, Connie Laverty, most recently met with 21 Director Sadberry and her staff. She has been a 22 wonderful addition to our team, 30 years of practical 23 experience sitting in the same chair as Gary Grief 24 does here, and Director Sadberry, in addressing 25 exactly that same thing. So we're working on that. 0093 1 We have a number of new ideas that we have presented 2 to staff that we think may do that. 3 And through our local management team 4 that works in concert with your staff, we are focusing 5 them on trying to shift the attention of the retailer 6 from such heavy reliance only on instant tickets and 7 where they have influence over the impulse sale, to 8 try to find a balance with the on-line set of games as 9 well. 10 We have some new initiatives, some of 11 which I'm not sure statutorily would work here. I 12 know they're being evaluated. We have some new 13 initiatives in what we call instant on-line games that 14 are showing some interesting promise. It's still too 15 early to say whether that game category will be 16 significant, though we do know in the State of 17 Illinois, it accounts for about 4 to 5 percent of 18 sales. In a smaller but meaningful European 19 jurisdiction in Morocco, in eight weeks it accounts 20 for 15 percent of sales, which gives us some great 21 interest there. 22 The other area that is probably 23 further -- and this is consistent with my earlier 24 comments that we have to anticipate your requirements 25 by five years -- is the movement outside of the United 0094 1 States into the interactive channels. That is 2 happening very quickly in many parts of the world. I 3 do not anticipate, however, that here in the State of 4 Texas, unless you tell me otherwise, but certainly our 5 view of the United States is, we do not see those 6 channels moving forward for lotteries at the present 7 time. 8 So I think our core focus remains on 9 optimizing the mix within the core category of games 10 to ensure that we continue to drive -- help our 11 customers drive net revenues, which is what ultimately 12 builds schools and sends kids to college and the like, 13 continues to increase. 14 But your experience is not dissimilar to 15 what we are seeing across the board in North America 16 at the present time. 17 COMMISSIONER CLOWE: Thank you, 18 Mr. Chairman. 19 Thank you, Mr. Turner. 20 MR. TURNER: Yes, sir. 21 CHAIRMAN COX: What are you doing to 22 help us drive net revenues? 23 MR. TURNER: Well, we're doing a number 24 of things here. Obviously, Ramon Rivera and my 25 colleagues could go into much more granular detail 0095 1 than I. But I think in Texas, we are working to, as I 2 indicated, to encourage our sales force to work with 3 retailers at the point of sale, to provide a more 4 balanced approach to sales, obviously bringing new 5 game recommendations and new ideas as part of that; at 6 the corporate level, bringing new products such as our 7 broadening array of self-service products, bringing 8 new retailers to help you and then working with your 9 staff on a daily basis to take -- to share risk and 10 take some new tacks. 11 Obviously, I know that Connie Laverty 12 and her staff shared a number of those ideas and will 13 continue to do that. So I think on many different 14 fronts, whether they be strategically at the corporate 15 level or tactically at the level that really makes 16 things happen, I think we've got a number of ideas 17 that we've shared with your staff to at least give you 18 choices or suggestions that maybe will help us drive 19 that net revenue number. 20 CHAIRMAN COX: I attended a meeting with 21 your sales staff -- and Connie was there -- and I was 22 very impressed with the orientation of some of the 23 ideas. They were toward net revenues rather than 24 sales. So I agree with you that at the tactical 25 level, there is something happening. I don't know 0096 1 that I could agree with you that at the strategic 2 level anything is happening at all. 3 MR. TURNER: Uh-huh. 4 CHAIRMAN COX: You stated at the 5 beginning of your remarks that we are aligned to a 6 common goal, revenues for the State of Texas. That's 7 not true. We offered you the opportunity to align our 8 interests by basing your fee on the revenues that go 9 to the school children of Texas. And, except for a 10 minor concession, you declined. 11 MR. TURNER: Uh-huh. 12 CHAIRMAN COX: So we are not partners. 13 Our interests are adverse, unfortunately. And we 14 continue to want to work on that issue at the 15 strategic level. Ramon and his folks and Connie are 16 doing a good job at the tactical level, but I don't 17 see anything above that. 18 Okay. Now, what I heard you talk about 19 in your prepared remarks was about formal governance, 20 the appearance of integrity and compliance. And all 21 of those certainly are very important -- and making 22 money. And certainly you're not going to be in your 23 job very long if you don't make money for your 24 stockholders. We understand that. 25 MR. TURNER: I can assure you of that, 0097 1 sir. 2 CHAIRMAN COX: Yes. And certainly the 3 appearance of integrity is important and compliance is 4 important and formal governance is important. I'm not 5 in a position to judge whether those things are formal 6 or substantive. And I know that you've met with the 7 Attorney General and with Ms. Kiplin -- or Mr. DeSocio 8 actually did -- and they're in a much better position 9 than I to make that judgment. 10 I guess probably the proof will be in 11 the pudding: If you don't have any more scandals, 12 it's working; and if you do, it isn't. One of the 13 things that we've talked about is that when you have 14 scandals, you get a black eye and we do, too. And we 15 get a black eye where we live, over on the Hill and 16 with our friends and with the citizens of Texas. 17 So we are very concerned about those 18 things, but we're very concerned about things on a 19 different level that I didn't hear you say one word 20 about, and that is core competency. 21 MR. TURNER: Uh-huh. 22 CHAIRMAN COX: I'm going to tell you a 23 story. We have a gentleman who is a professor down at 24 the San Antonio College, I think it is, and he teaches 25 statistics and mathematics. And he has taken a 0098 1 significant interest in the Texas Lottery, both from 2 the standpoint of solving how do our games work, to 3 looking at the statements that we make and determining 4 whether they're true, to looking at disclosures that 5 we make and determining whether they are fair. 6 Gerald Busald, this professor, came to 7 this board several months ago -- perhaps it was a year 8 ago -- with eight points that he thought we should 9 improve on, all of which related to systems which your 10 company manages for us. 11 MR. TURNER: Uh-huh. 12 CHAIRMAN COX: Our staff came back to us 13 recommending that we adopt none of those. And in 14 large part, the reasons that they gave us were that 15 GTECH can't do it. Now, Chairman Clowe and I dug in 16 on that, and we said to our staff on seven of those 17 eight instances, "Yes, you will do it, and GTECH will 18 find a way." And you know what? GTECH found a way. 19 On the eighth item, that had to do with 20 game closings and reporting to the public on how many 21 unclaimed prizes remained on the instant games. I 22 have reviewed a portion of that process -- that is, 23 our internal game-closing procedures -- and had 24 determined that they were sound. And after he pointed 25 out to us several games -- a game in which we were 0099 1 still selling tickets where no top prizes at the top 2 three tires remained, I commented that I had looked at 3 our game-closing procedures and they were sound. 4 Well, a couple of Saturdays later, above 5 the fold on the front page in the middle of the 6 Houston Chronicle, there's the story about Texas 7 Lottery selling tickets where there are no winners 8 left. 9 Now, the next week, Director Sadberry 10 and I had the opportunity to visit with the Chairman 11 of our legislative oversight committee at his 12 request -- 13 MR. TURNER: Uh-huh. 14 CHAIRMAN COX: -- and we were told that 15 that was unacceptable. We determined independently 16 that that was unacceptable. And we found that instead 17 of the procedure that we had been following whereby 18 your company would post the unclaimed prizes about 19 three weeks late and the games would get closed only 20 after -- 60 days after we called them and that we 21 weren't calling them based on a review that took place 22 more than once a month, we found that we could do that 23 review every day. And suddenly GTECH is able to use 24 the on-line terminals to generate this same report on 25 a realtime basis, and suddenly GTECH is able to get 0100 1 the games closed in 45 days rather than 60. 2 Now, all of these things had to 3 happen -- and this is just one story I could tell 4 you. 5 MR. TURNER: Uh-huh. 6 CHAIRMAN COX: All of these things had 7 to happen because the press had to beat it into our 8 heads, and the Legislature had to tell us, "Do it," 9 and we did it. 10 Now, you talked about anticipating our 11 needs by five years. Maybe at some level you're 12 anticipating our needs by five years. But at the 13 level where I am concerned and talking about today, 14 that is the level of service to our customer and the 15 level of trust that our customer has in us and in our 16 system, which you operate, you're not anticipating our 17 needs by any time; you're resisting our opportunity -- 18 our request for improvement. And only after we get 19 beat up in the press and at the Legislature are you 20 responding. 21 Now, what I would ask you to do, 22 Mr. Turner, is to continue to look at issues of making 23 money and formal governance and perception of 24 integrity and compliance, but take a real look at the 25 core competency issues where the rubber meets the 0101 1 road, where our customers are either satisfied or not 2 satisfied, where the Legislature and the leadership 3 are either satisfied or not satisfied and where the 4 public of Texas is either satisfied or not satisfied. 5 MR. TURNER: Mr. Chairman, those are all 6 reasonable concerns. I was not aware of the 7 particular example you gave. But, obviously, if we 8 are not aligned around common goals -- and to your 9 statement you're not sure that we are -- then, 10 obviously, we need to continue to work to do better. 11 You know, it is critical that the 12 solutions we offer provide you the flexibility to 13 operate your business in a manner that protects the 14 public trust. If there are issues in that area, then 15 we will make every effort to resolve those issues with 16 you. 17 CHAIRMAN COX: And I'm concerned about 18 your statement that you didn't know about this 19 situation, because you just told Chairman Clowe that 20 you're the person on your board of directors who is 21 move familiar with what's going on in Texas. And if 22 you didn't know about what the headlines were in the 23 Houston Chronicle on a Saturday morning on the front 24 page, then certainly that would say to me that nobody 25 else on your board of directors knew that. And that 0102 1 would say to me that members of your board of 2 directors are not sensitized to the needs that 3 Chairman Clowe and I and Director Sadberry and his 4 staff and the governing bodies and the leadership of 5 the State of Texas have. 6 And I ask you to please look at that 7 governance and try to get somebody on your board who 8 thinks every board meeting, every moment that he's 9 thinking about GTECH business, he's thinking about how 10 do I serve those customers better, not these other 11 things that you're addressing so well. 12 MR. TURNER: I understand. Well, 13 that's, obviously, one of my primary responsibilities 14 and one of the things I think about on a daily basis. 15 Certainly, as you can appreciate, with 50 -- 100 16 customers in 50 countries, we've got a lot of masters. 17 But in the case of each and every contract, well, you 18 know, what matters is how we serve, how we serve you 19 in the State of Texas. And if that's something we 20 need to improve on, and apparently it is, then we will 21 do so. 22 CHAIRMAN COX: Director Sadberry, is 23 there anything you would like to add? 24 MR. SADBERRY: Not at this time, 25 Chairman. 0103 1 CHAIRMAN COX: Okay. Thank you very 2 much, Mr. Turner. 3 MR. TURNER: Thank you, sir. 4 CHAIRMAN COX: We appreciate you coming 5 in. 6 MR. TURNER: Indeed. 7 CHAIRMAN COX: Okay. Chairman Clowe, 8 with your permission, we'll go to the bingo agenda 9 now, which starts with Item III? 10 COMMISSIONER CLOWE: Yes, sir. 11 AGENDA ITEM NO. III 12 CHAIRMAN COX: Okay. Report, possible 13 discussion and/or action on the implementation of 14 recommendations contained in the Internal Audit Report 15 on bingo audit services, including development of 16 rules. 17 Mr. Sanderson. 18 MR. SANDERSON: Good morning, Chairman 19 and Commissioner. For the record, I'm Phil Sanderson, 20 Assistant Director of the Charitable Bingo Operations 21 Division. 22 Included in your notebook is a copy of a 23 spreadsheet that has been updated to indicate the 24 status of the implementation of the recommendations of 25 the Internal Audit on the audit activities of the 0104 1 Charitable Bingo Operations Division. This 2 spreadsheet has been provided to members of the 3 Licensing and Administrative Procedures Committee at 4 the Capitol. 5 To update you on the progress, we are 6 still on track to meet the self-imposed deadlines that 7 were presented at the last Commission meeting. 8 Currently audit staff and myself is working very 9 closely with staff from Internal Audit and the Legal 10 Services Division on development of the new rules to 11 implement the recommendations. These rules include a 12 books and records requirements, house rules and fair 13 conduct of bingo, a general audit rule, dispute 14 resolution rule, corrective action rule and internal 15 control guidelines, as well as a rule that is 16 outlining the permissible expenses, which is before 17 you today for your consideration. 18 The audit manager and Information 19 Resource staff have been working closely to develop a 20 program that will, based on the risk factors 21 identified, to develop a listing of organizations and 22 ranking them by risk to perform audits. 23 The final audit report and audit 24 completion letters have been developed and are pending 25 approval. The written audit plan has been drafted. 0105 1 Revisions are currently being made to incorporate 2 comments received from the trainer that provided the 3 auditor training back in March as well as implementing 4 some use of the card-minding systems to assist in the 5 audit process. 6 The committee that was formed to perform 7 the comprehensive review of all the functions 8 performed by the Audit Services Department has met. 9 And the goal of the committee was to clarify the 10 auditor roles and responsibilities. 11 Additionally, there is a recommended 12 organizational structure that would allow for greater 13 independence of the Audit Services Department. That 14 committee has concluded their meetings and has issued 15 a recommendation which I just received yesterday and 16 am reviewing. I would like to thank Toni Erickson, 17 Janine Mays, Kathy Pyka and Ed Rogers for their 18 participation on that committee. 19 Internal Audit has completed their 20 initial review of the audit reports for organizations 21 that received an audit during the look-back period 22 that was identified. 23 And I would at this time ask our 24 internal auditor, Cat Melvin, to come to the table and 25 provide to you her report on those findings. 0106 1 MS. MELVIN: Good morning, 2 Commissioners. For the record, I'm Catherine Melvin, 3 Director of the Internal Audit Division. I have with 4 me Ms. Susan Oballe, and I'm going to turn to her to 5 present the results of that review. 6 MS. OBALLE: Good morning, 7 Commissioners. For the record, I'm Susan Oballe with 8 the Internal Audit Division. 9 Internal Audit works for the Charitable 10 Bingo Operations Division and with the Information 11 Resources Department to identify all audits and 12 reviews that covered an audit period beginning with 13 the fourth quarter of 2003 to the first quarter of 14 2007, in which the audit report cited a violation. 15 We identified 571 reports and reviewed 16 each of these reports to determine the impact the 17 audit may have had on the licensee. From this review, 18 we determined that audits resulted in the very 19 monetary resolution to the violation cited where the 20 licensee was required to redeposit funds into their 21 bingo account, remove funds from their bingo account 22 or make additional charitable distributions, or a 23 non-monetary resolution to the audit violation cited 24 where the licensee was required only to provide a 25 written response to the audit report. 0107 1 There were 329 reports that resulted in 2 a non-monetary resolution to the audit report issued. 3 We recommend that no further action be taken regarding 4 these reports. 5 CHAIRMAN COX: Okay. Let me stop you 6 there. 7 MS. OBALLE: Sure. 8 CHAIRMAN COX: Now, you had 329 reports 9 that resulted in what, Susan? 10 MS. OBALLE: That are non-monetary, 11 meaning that they just had to reply to the audit 12 report that was issued. 13 CHAIRMAN COX: Okay. Now, were any of 14 those matters that were, say, strike one, strike two 15 or one more of these and you're out, so that they did 16 count but maybe not monetarily? 17 MS. OBALLE: Not that I understand. 18 CHAIRMAN COX: Okay. 19 MS. OBALLE: In fact, the current 20 process -- or, actually, the process that we reviewed 21 that the auditors were using is if the licensee came 22 into compliance by providing a written response, it 23 never even came up to the Austin headquarters, so it 24 wasn't even a record. 25 CHAIRMAN COX: Okay. 0108 1 MS. OBALLE: 242 reports resulted in a 2 monetary resolution to the audit report, issued with 3 the following breakdown: 217 reports required a 4 redeposit. 24 -- 5 COMMISSIONER CLOWE: Say that again, 6 please. 7 MS. OBALLE: 217 reports required a 8 redeposit into the bingo bank account. 9 CHAIRMAN COX: Now, a redeposit from 10 another account? 11 MS. OBALLE: Yes, either their general 12 fund account of the organization and put it into their 13 bingo account. 14 CHAIRMAN COX: Okay. So it required a 15 transfer of money from one account to another but not 16 a knew infusion of money? 17 MS. OBALLE: No. 18 CHAIRMAN COX: This is the same old 19 money being moved around? 20 MS. OBALLE: It's all the organization's 21 money. So whether it's in this account, the general 22 fund account into the bingo account. 23 CHAIRMAN COX: Okay. 24 MS. OBALLE: And then 24 required a 25 removal of funds from the bingo account into the 0109 1 general fund account. 2 CHAIRMAN COX: Okay. But if you add 3 cash together, none of these resulted in anything? 4 MS. OBALLE: No. It was just a transfer 5 of funds from one account to the other. So at the end 6 of day, it was a -- 7 COMMISSIONER CLOWE: Well, it could have 8 an impact on the charitable contributions, couldn't 9 it, if money went back into the bingo account? 10 MS. OBALLE: It would -- well, really, 11 the money is for disallowed expenses, per se. And so 12 if it was related to sales, then it would have an 13 impact on the calculated charitable distribution 14 requirement. 15 COMMISSIONER CLOWE: So it could benefit 16 the charity. 17 MS. OBALLE: And -- 18 CHAIRMAN COX: Okay. So, now, let me 19 just think about that for just a second. 20 MS. OBALLE: I may be able to answer a 21 question, if you want. 22 CHAIRMAN COX: Yes. Go ahead. 23 MS. OBALLE: Because one report did 24 require, based on the audit findings, that additional 25 charitable distributions be made. So of these, one 0110 1 did have that result. 2 COMMISSIONER CLOWE: One of them? 3 That's not much impact. We're right on it. 4 CHAIRMAN COX: That's one out of 600 or 5 so. 6 Okay. But let's get back to Chairman 7 Clowe's question. Cash still adds up at the end of 8 the day. But you said something about it having an 9 impact on the required charitable distribution. Tell 10 us how that might work. 11 MS. OBALLE: That would be if the 12 auditor determined that the organization underreported 13 sales. And so they're saying, you know, you have to 14 deposit money into your bingo account to account for 15 these sales that you didn't report. 16 The 35 percent charitable distribution 17 requirement -- and, Phil, you may have to help me on 18 this -- is based on sales minus their prizes to get 19 their net receipts. And they get an expense credit. 20 And at the end of the day, they have 35 percent of 21 that net to distribute. 22 CHAIRMAN COX: Okay. So you said this 23 would be a case if they are having to redeposit 24 something equivalent to sales? 25 MS. OBALLE: Correct. 0111 1 CHAIRMAN COX: If it's above the net win 2 line, it would affect; if it's below the net win 3 line -- namely, expenses -- it wouldn't affect the 4 charitable contribution? 5 MS. OBALLE: Correct. 6 CHAIRMAN COX: Now, what kinds of things 7 were our auditor's finding that might affect revenue? 8 MS. OBALLE: There were a few reports 9 that I saw in our review that they did so some 10 analysis on like pull-tab depletion to say that, you 11 know, the reported sales were incorrect. But most 12 of -- as we reported in our audit report, most of the 13 work was in the expense category where they were 14 saying this is a disallowed expense based on 15 reasonable or necessary criteria or other criteria 16 they were using. 17 CHAIRMAN COX: Okay. Go ahead. I'm not 18 sure I'm clear yet -- 19 MS. OBALLE: Okay. 20 CHAIRMAN COX: -- but maybe you'll clear 21 it up. 22 MS. OBALLE: The next part is just to 23 let you know that, however, no administrative actions 24 or penalties were assessed against the licensees as a 25 result of these audits. Therefore, they had to 0112 1 redeposit the funds in the account, but the agency did 2 not enforce any type of monetary penalty or 3 administrative penalty against these licensees. 4 The Charitable Bingo Operations Division 5 has stated that the violations cited in these audit 6 reports will not be counted against the licensee on a 7 go-forward basis. The licensees will be given a clean 8 slate, if you will. 9 Internal Audit recommends that the 10 licensees -- and this would be about 235 -- be 11 contacted by the Charitable Bingo Operations Division 12 to provide the licensee with an opportunity to go 13 through the new dispute resolution process that is 14 being developed by the division. This will provide 15 the licensee an opportunity to have their audit 16 reexamined to determine if the criteria used during 17 the audit was valid criteria, as the documented audit 18 work supports the conclusions drawn that resulted in 19 violations cited. 20 I would be happy to answer any further 21 questions. 22 CHAIRMAN COX: Okay. Now, we've got 23 audits that were done by Charitable Bingo Division's 24 auditors, and we're going to send out a letter that 25 says to the people who are audited: If you have any 0113 1 concerns about the sanctions that were applied in your 2 instance, you can contact this Dispute Resolution 3 Center. Now, are they going to have and can Chairman 4 Clowe and I have the assurance that this Dispute 5 Resolution Center is independent of the auditors who 6 did those audits in the first place? 7 MS. OBALLE: I believe that is our 8 intent. I mean, as far as how much independence we 9 can assure -- in fact, the auditors that performed the 10 work will not be reviewing the work. It may be at the 11 level of the division director and with an opportunity 12 of an outside mediator to come in and work with the 13 two parties to see if there is some type of agreement 14 that can be reached. 15 CHAIRMAN COX: So what I hear you saying 16 is that you're sensitive to the issue that I raised of 17 independence -- 18 MS. OBALLE: Yes. 19 CHAIRMAN COX: -- and that y'all will 20 make sure one way or another that that's in place? 21 MS. OBALLE: Yes, sir. 22 CHAIRMAN COX: Thank you. 23 MS. OBALLE: Thank you. 24 MR. SANDERSON: And that concludes the 25 report on the implementation of the Internal Audit, 0114 1 and I'll be glad to answer any other questions you may 2 have. 3 CHAIRMAN COX: Okay. Thank you, Phil. 4 AGENDA ITEM NOS. IV AND V 5 CHAIRMAN COX: Item IV, consideration of 6 and possible discussion and/or action, including 7 adoption of repeal, 16 TAC §402.603 relating to bonds 8 or other security. 9 Ms. Joseph. 10 MS. KIPLIN: Mr. Chairman, I'm filling 11 in for Ms. Joseph today -- 12 CHAIRMAN COX: Ms. Kiplin. 13 MS. KIPLIN: -- if I may. And also if I 14 may, if I could take this item and the next item up 15 together. The next item is the companion adoption of 16 a bond rule. This item is the repeal. 17 CHAIRMAN COX: Please so. 18 MS. KIPLIN: Commissioners, in the past, 19 in particular with the repeal of the bingo 20 administrative rule, you-all authorized the staff to 21 publish the proposed repeal in the Register, and that 22 publication was on December 29, 2006. You also, not 23 at that time but at another Commission meeting, voted 24 to authorize the staff to publish the proposed new 25 bond rule in the Texas Register. Both of these 0115 1 rulemakings are ripe for your consideration today. 2 Each were part of a rulemaking comment hearing and a 3 comment -- that hearing for the repeal was January 18, 4 2007. And the one for the new rule was March 30th. 5 And comment was received on both of these rulemakings. 6 The comment supported the repeal and also the adoption 7 of the new rule. There were no written comments that 8 were received. 9 At this time the staff does recommend 10 that the Commission adopt both rulemakings without 11 changes to the way in which they were published in the 12 Register. 13 COMMISSIONER CLOWE: I don't have any 14 questions. I'm ready to move the adoption. 15 CHAIRMAN COX: Second. 16 It's been moved and seconded to repeal 17 the one and adopt the second. Is there any further 18 discussion? 19 All those in favor, please say "Aye. 20 COMMISSIONER CLOWE: Aye. 21 CHAIRMAN COX: Aye. 22 Opposed? 23 Passes 2-0. That's Items IV and V. 24 Right? 25 MS. KIPLIN: Commissioners, I have 0116 1 orders adopting the repeal and an order adopting the 2 new rule. 3 AGENDA ITEM NO. VI 4 CHAIRMAN COX: Item VI, consideration of 5 and possible discussion and/or action, including 6 adoption, on new 16 TAC §402.505 relating to 7 permissible expense. 8 Ms. Kiplin. 9 MS. KIPLIN: Commissioners, this is also 10 a staff recommendation to adopt a new rule. You-all, 11 at a previous Commission meeting, voted to publish the 12 proposed rule in the Register to receive public 13 comment. It was also noticed up for a public comment 14 hearing. That hearing was held on March 30th. 15 Comment was received at the comment 16 hearing. There was no written comment received during 17 the comment period. All the comment was supportive 18 and in favor of the adoption of this new rule. 19 The purpose of this new rule is to 20 provide the organizations with guidances as to what 21 expenses are reasonable or necessary as those expenses 22 relate to the expenditure of funds that are generated 23 from the conduct of bingo games. 24 Staff does recommend adoption of this 25 new rule. 0117 1 CHAIRMAN COX: Okay. 2 COMMISSIONER CLOWE: Is there a sense, 3 counselor, that the industry is satisfied in regard to 4 the identification of permissible expenses to the 5 extent that the rule can become effective under the 6 statute? 7 MS. KIPLIN: Yes, I think there is. 8 There are members of the industry that are here that 9 might want to address that. But, yes, I think so. 10 These are guidelines. We're avoiding a 11 laundry list approach, simply because laundry list 12 approaches are only as good as that list itself, and 13 then there is a focus. 14 COMMISSIONER CLOWE: And that's where my 15 question goes. I think the industry has wanted 16 clarification and perhaps wanted a laundry list. And 17 I understand what you're saying, and I understand what 18 the effort is. And I'm asking you to tell us what 19 your perception of the level of satisfaction is from 20 the industry. 21 And the industry had a chance to comment 22 on this -- 23 MS. KIPLIN: Yes. 24 COMMISSIONER CLOWE: -- and they 25 commented favorably? 0118 1 MS. KIPLIN: Yes. 2 COMMISSIONER CLOWE: But I'm asking what 3 your sense is of the level of satisfaction. I think 4 these folks are entitled to the best effort that can 5 be given to giving them direction and clarification, 6 short of the laundry list. So where do you think we 7 are in that regard? 8 MS. KIPLIN: I think we're good. I 9 think we also recognize -- Mr. Fenoglio and I had a 10 conversation on this particular subject. And I 11 likened it to -- you know, I guess a simple analogy -- 12 but a circle. And everything inside the circle will 13 be permissible. And the closer you get to the center 14 of the circle, everybody knows that that's 15 permissible. But as you get closer and closer to the 16 line from permissible to impermissible, that's where 17 it starts to get a bit gray and subject to 18 interpretation. 19 I think in that conversation, we agreed 20 that we would see how well this -- well, how effective 21 this rule is when we start getting inquiries in terms 22 of bingo -- requests for bingo advisory opinions. We 23 also recognize that rulemaking is dynamic; it's slow 24 but it is dynamic. And there may be a need to come 25 back in and ask for amendments to this rule to address 0119 1 those issues, those items that we just didn't think 2 about or we didn't anticipate that seem to be a 3 predominant source of these kind of inquiries. And I 4 think staff is open to that, and I think the industry 5 is also open to that process. 6 One of the suggestions that came from 7 the comment -- actually, by Mr. Fenoglio at the 8 comment hearing -- was to maybe have a Q and A, a 9 frequently asked questions, on the website so people 10 could key in on that. You know, I think that's a good 11 suggestion. And the agency response in the adoption 12 is that we do agree with that. 13 Another suggestion that Mr. Heinlein 14 made was, when you're going out and you're doing these 15 training classes, you know, train on these kind of 16 issues, because that may be an opportunity for that 17 level of inquiry and we can immediately address those 18 kinds of concerns on a broader level than on a, for 19 example, compliance level. 20 I think we all agree, we don't want to 21 be addressing these on a compliance level. We want to 22 be addressing these on a proactive level. We'll be 23 looking for trends as they come through the bingo 24 advisory opinion request process. I think we're all 25 open to having immediate feedback by people either 0120 1 writing us, calling us, and saying, "Hey, we've got 2 this issue that's fuzzy. It's getting close to the 3 line. We don't know. Is it on the outside of the 4 circle or the inside of the circle?" And so we'll be 5 mindful of that on a go-forward basis. 6 COMMISSIONER CLOWE: Phil, do you adopt 7 those comments? 8 MR. SANDERSON: Yes, sir, I do. I 9 believe that in my discussions with industry, what 10 this rule does is, I think it does allow for a little 11 bit broader interpretation, and it also allows for 12 some recordkeeping requirements that puts the 13 organization responsible to justify some of these 14 expenses. 15 And, of course, that is where, when an 16 audit is performed or some type of audit activity, 17 that justification is: Will it be used to determine 18 the permissibility of a certain expense as well as the 19 amount of the expense? 20 COMMISSIONER CLOWE: Mr. Chairman, I 21 would be prepared to move the adoption of the staff 22 recommendation. And I think this discussion is 23 helpful because this is a dynamic issue in my opinion. 24 And I think the industry is entitled to know what the 25 speed limit is and not be told when they get stopped, 0121 1 "Well, you were five miles over the speed limit." But 2 clearly when the violation is there, to understand 3 that that is a violation. And I think, you know, we 4 ought to start with this and, as the General Counsel 5 indicated, be open to improvement in the future as the 6 process unfolds. 7 CHAIRMAN COX: And I think the process 8 is going to be very important. You know, this is a 9 different approach than we've used in the past. This 10 is a general standard that allows discretion to the 11 licensees and requires that our auditors are going to 12 have to respect that discretion. And they're going to 13 have to be trained in applying that standard. 14 So the standard I think is a step in the 15 right direction. But what's going to make it work is 16 the proper -- and properly informing the licensees and 17 properly training our auditors so that they apply it 18 properly. 19 COMMISSIONER CLOWE: That's exactly 20 right, and that's well said. And I think it puts a 21 burden, Phil, on the auditing staff and in the bingo 22 operator training program to educate the industry and 23 achieve the highest level of compliance and go forward 24 together. And I think this is a good path to go down. 25 CHAIRMAN COX: That's fine. I second 0122 1 your motion. 2 Motion has been made and seconded that 3 we approve the staff recommendation on the new 16 TAC 4 §402.505 related to permissible expenses. All in 5 favor, say "Aye." 6 COMMISSIONER CLOWE: Aye. 7 CHAIRMAN COX: Aye. 8 Opposed? 9 Motion passes 2-0. 10 AGENDA ITEM NO. VII 11 CHAIRMAN COX: Okay. Item VII, report, 12 possible discussion and/or action on 16 TAC §402.300 13 relating to pull-tab bingo and/or §402.305 relating to 14 progressive bingo. 15 Mr. Sanderson. 16 MR. SANDERSON: Good morning, 17 Commissioners. This agenda item was placed -- or this 18 item was placed on the agenda to give you an update of 19 where we are in the adoption or action on the two 20 rules for pull-tab bingo and progressive bingo. 21 Both of these rules were proposed at the 22 December meeting. They were published in the December 23 29th Texas Register. We have had I think three public 24 comment hearings on these rules. We received numerous 25 comments. 0123 1 Additionally, there have been two 2 legislative bills filed, House Bill 2265 and House 3 Bill 2206 and Senate Bill 1110, which is a third bill, 4 that deal with pull-tab bingo on electronic card- 5 minding devices. It also deals with progressive 6 bingo. 7 Staff recommends that -- you know, this 8 is just an update for your information, to let you 9 know where we are in the process. There is no action 10 required on these until June the 29th, which gives us 11 time to see how legislation progresses through both 12 chambers. 13 And with that, I'll be glad to answer 14 any questions you may have. 15 CHAIRMAN COX: I think that's a sound 16 recommendation, Phil. 17 Are you comfortable with that? 18 COMMISSIONER CLOWE: Yes. 19 CHAIRMAN COX: Okay. Thank you. 20 AGENDA ITEM NO. VIII 21 CHAIRMAN COX: And Item VIII, report, 22 possible discussion and/or action on new 16 TAC 23 §402.204 pertaining to prohibited price fixing. 24 Ms. Kiplin. 25 MS. KIPLIN: Commissioners, this is my 0124 1 item. This has to do with reporting to you that we 2 mistakenly filed the incorrect version of the proposed 3 price-fixing rule. Let me tell you, I apologize for 4 that. That's my responsibility. It had to be pulled 5 down. It was not what you voted to publish. We have 6 since pulled down the incorrect version, and we have 7 moved forward to publish that which you did authorize 8 and voted to publish for comment. 9 And that will be in the April 20th Texas 10 Register. It, as a result, will delay this 11 Commission's consideration on this matter. There was 12 a rulemaking comment hearing. And, of course, it was 13 in connection with that rulemaking. We did have the 14 correct version for people who wished to provide 15 comment. They did provide comment on what you 16 actually voted to propose in the Register. 17 Our plans are to have a rulemaking 18 comment hearing. We're trying to avoid 19 inconveniencing anybody as a result of this error. 20 And we're trying to coordinate that so that it will 21 occur. And we've noticed it up for May 2nd, so it 22 will occur the same day as the Bingo Advisory 23 Committee hearing. 24 Our plans are to incorporate all comment 25 that was received into this rulemaking record that's 0125 1 on the correct version. You know, I apologize again 2 for the error. We are addressing that to determine 3 how that happened, trying to correct it on the front 4 end so that we're having a much better review process 5 on what's getting published in the Register. And then 6 when the publication comes out, we're having a review 7 process immediately upon getting the receipt of that 8 publication, to ensure that if there was an error, 9 we're picking it up much more timely than we did in 10 this case. 11 CHAIRMAN COX: Thank you for that 12 report. That doesn't require any action, does it? 13 MS. KIPLIN: No, it doesn't. 14 AGENDA ITEM NO. IX 15 CHAIRMAN COX: All right. Item IX, 16 report by the Charitable Bingo Operations Director and 17 possible discussion and/or action on the Charitable 18 Bingo Operation Division's activities. 19 Mr. Sanderson. 20 MR. SANDERSON: Commissioners, in your 21 notebook is the report on the activities of the 22 Charitable Bingo Operations Division. I would like to 23 point out the quarterly reports for the first quarter 24 of 2007 are due next Wednesday, the 25th. The annual 25 NAGRA conference is scheduled in Kansas City on 0126 1 June 10th through the 13th. As co-chair of the 2 Charitable Gaming Committee, I will be moderating the 3 session on the Charitable Gaming Committee's general 4 session. 5 Homer Gonzalez will be there to be a 6 presenter for a session that's on the electronic card- 7 minding devices. And I believe Kristen Mitchell from 8 Legal Services will also be attending that conference. 9 The BAC is scheduled to meet in two 10 weeks, on May the 2nd. And one of the items that you- 11 all discussed at the last Commission meeting relating 12 to the nomination process of the members, the BAC 13 annual work plan and the continuance of the BAC was 14 discussed. And staff is in the process of drafting 15 revisions to the BAC rule that will incorporate all 16 three of these items, plus we're also looking at the 17 composition of the membership of the BAC. We are 18 planning on having a draft of that version ready for 19 discussion at the BAC to receive their input. 20 And with that, I'll be glad to answer 21 any other questions you have. 22 CHAIRMAN COX: Thank you, Phil. 23 Okay. That's the end of the charitable 24 bingo agenda. 25 0127 1 AGENDA ITEM NO. X 2 CHAIRMAN COX: Item X, report, possible 3 discussion and/or action on lottery sales and revenue, 4 game performance, new game opportunities, market 5 research and trends. 6 Ms. Pyka and Mr. Tirloni. 7 MS. PYKA: Good morning, Commissioners. 8 For the record, my name is Kathy Pyka, Controller for 9 the Lottery Commission. And with me to my right is 10 Robert Tirloni, our Products Manager, and Dr. David 11 Sizemore, our research coordinator. 12 Our first chart that we have for you 13 this morning reflects revenue from sales and net 14 revenue of the state for the week ending April 7th of 15 2007. Total sales for this 32-week period amounted to 16 $2.27 billion, while estimated net revenue to the 17 state for this period was $578.7 million. 18 Our net revenue to the state reflects a 19 2.6 percent decline from this same period in fiscal 20 year 2006. In our prize expenses, the percentage of 21 sales reflected at 62.5 percent is a slight decline 22 from where we were in fiscal year 2006. 23 Our next slide for you this morning 24 summarizes the change in sales by game from fiscal 25 year 2006 to 2007. Our fiscal year 2007 sales 0128 1 continue to reflect a 3.3 percent decline from where 2 we were in fiscal year 2006. The overall $77.9 3 million decline includes a $59.9 million decline in 4 our instant ticket product, or 3.4 percent, and an 5 $18 million decline, or 3.1 percent with our on-line 6 products. 7 Commissioners, last month we indicated 8 further research would be performed in the instant 9 ticket area. And I wanted to share that we expect to 10 have two reports on the instant ticket decline, one 11 from GTECH and one from Professors Huff and Jarrett at 12 our June Commission meeting. 13 Our next slide includes fiscal year 2007 14 year-to-date sales by game. As noted on this slide, 15 75.2 percent of sales, or $1.7 billion, was from 16 instant tickets. 17 CHAIRMAN COX: Kathy, let's go back to 18 the previous one, if we may. 19 MS. PYKA: Okay. 20 CHAIRMAN COX: What can you tell us 21 about the large decline in Mega Millions and Megaplier 22 sales? That number kind of jumps out as asking for a 23 little more explanation. 24 MS. PYKA: Certainly. We have 25 experienced a significant decline in fiscal year 2007 0129 1 sales, of Mega sales. And, actually, I'm going to ask 2 Robert to take us to a supplemental chart, if you 3 don't mind. 4 Thank you, Robert. 5 This chart compares our fiscal year 2006 6 sales, which are the red bars, starting with September 7 of '05 through March of '06, to our fiscal year 2007 8 sales, September '06 to April of '07. 9 And as you'll note, in fiscal year 10 2007 -- and it's a little difficult to read -- but we 11 had three jackpots over $200 million, the first being 12 $250 million, then we had a $315 million and then a 13 $267 million. 14 In fiscal year 2007, the only jackpot 15 that we've had over $200 million was the record- 16 setting $370 million jackpot that we recently had. 17 We've not had the level of jackpots with our Mega 18 products in fiscal year 2007 that we did in fiscal 19 year 2006. At one point in time, this year that 20 decline was even greater, but we were able to adjust 21 some of the sales decline with that $370 million 22 jackpot that we had last month. 23 CHAIRMAN COX: Is there anything we can 24 conclude from that schedule about whether this is 25 anything other than just jackpot-driven? In other 0130 1 words, is the game getting tired? 2 MS. PYKA: I don't know that I have 3 enough information to say the game is getting tired. 4 That might be more of a Products question. But from a 5 sales perspective, you know, we're definitely seeing 6 that not having those large jackpots has definitely 7 created an impact in sales. I don't know if Robert 8 has anything to add. 9 CHAIRMAN COX: I was looking for a point 10 of comparison, and I don't see any two that look very 11 identical in the green versus the red, so I can't 12 really observe anything from that schedule. 13 MR. TIRLONI: Chairman, to your question 14 about the game and is it getting tired, I don't think 15 that the game is getting tired. I think it is a 16 direct result of jackpot fatigue and the continual 17 raising of the bar, so to speak, where, you know, at 18 one point in time, $200 million is appealing to 19 players. Then you get up to $300. And the next time 20 around, 300 isn't as appealing. It's just the 21 continual raising of the bar. 22 And the issue that we've been 23 experiencing with Mega Millions this fiscal year has 24 been pretty much seen across the board by all the 25 participating states. They're all been suffering 0131 1 sales decline on the Mega game, and everybody is 2 attributing that to the lack of high jackpots, as 3 Kathy discussed. 4 CHAIRMAN COX: And if I remember, you 5 have recently made a presentation to us about what 6 other states were experiencing, and we're not in the 7 most pain. 8 MR. TIRLONI: That's correct. That was 9 a few months back. And I believe at that time we 10 talked about Massachusetts. And I believe their 11 decrease in Mega Millions sales was actually greater 12 than ours at that point in time. 13 CHAIRMAN COX: Is there any way to do an 14 analysis of jackpots and correlate it with revenue? 15 It's probably not a linear relationship. Do you know 16 of any way you might be able to do a marginal analysis 17 of jackpots and determine whether, for the same 18 average level of jackpot or whatever the measure you 19 might come up with, that sales are either better than, 20 worse than or about the same as previous years? 21 And I'm asking David on this. 22 DR. SIZEMORE: Good morning Chairman, 23 Commissioners. I'm David Sizemore, research 24 coordinator for the Texas Lottery. 25 I would imagine that you could correlate 0132 1 the two variables: The level of a jackpot, the size 2 itself, and perhaps average out sales over time or 3 around the period where the jackpot is ascending to a 4 particular level, and see if there is any kind of 5 significant relationship. But I'm not sure what that 6 would necessarily tell you. If you're looking for a 7 causal argument, that might be a different story. 8 CHAIRMAN COX: Yes. I don't think we're 9 looking for causal. I mean, it would be great to have 10 it. But I was really just asking, could you explore 11 the relationship and see what you observe as you 12 explore it? 13 DR. SIZEMORE: Certainly. And I would 14 imagine that it would be a very strong association 15 between those two things, sales and jackpot size. 16 CHAIRMAN COX: Pardon me for 17 interrupting, Ms. Pyka. 18 MS. PYKA: That's all right. We'll go 19 back to the slide that we were on. So I'm looking at 20 fiscal year 2007 sales by game, beginning instant 21 tickets, at $1.7 billion, or 75.2 percent, followed by 22 8.3 percent of sales, or $188.1 million from our 23 Pick 3 game, followed by 6.7 percent and 24 $151.5 million from Lotto Texas, and then 5 percent 25 and $114.2 million from Mega Millions. 0133 1 And then this is a simple graph of sales 2 by product, as we just discussed. 3 And with that, Robert will now discuss 4 sales by price point. 5 MR. TIRLONI: Good morning, 6 Commissioners. For the record, my name is Robert 7 Tirloni. I am the Products Manager for the 8 Commission. 9 This pie chart shows the $1.7 billion in 10 year to date instant ticket sales, broken down by 11 price point. And, Commissioners, we have not realized 12 any changes. The five dollar continues to be our 13 leading price point, followed closely by the two and 14 then the ten dollar price point. So, again, not much 15 variation in this data. 16 I do have an update for you this 17 morning. After the last Commission meeting where we 18 had a discussion on beginning game closing processes 19 when games had zero top prizes or after all of the top 20 prizes in a game were claimed, and the agency 21 procedure was approved by Director Sadberry, I wanted 22 to let you know that we have actually initiated game- 23 closing processes on two games as a result of that. 24 We did call a two dollar game, In The 25 Chips. We sent out a terminal message to our retailer 0134 1 base on March 28th. The call date was that Friday, 2 the 30th. And the close date, which is 45 days after 3 the call date, will be May 14th. That game was almost 4 80 percent sold. 5 We also had a seven dollar game, 6 Magnificent 7's, that we called on Friday, the 6th of 7 April. We actually sent the message out to retailers 8 about that game having zero top prizes, on April 3rd. 9 That game will close on the 21st of May, and that game 10 was just over 92 percent sold. 11 This presentation was prepared in 12 advance of today's meeting, so I don't have the 13 information in the presentation. But we were notified 14 yesterday of a ten dollar game that had all the top 15 prizes claimed, and so we initiated our process on 16 that game yesterday as well. 17 Commissioners, I have a brief update on 18 Lotto Texas. We did recently roll up to a $75 million 19 advertised jackpot. That was for the drawing on 20 Saturday, April 7th. The jackpot ticket was sold in 21 League City. The draw sales for the entire roll 22 cycle, so starting from the $4 million starting 23 jackpot, all the way through the $75 million jackpot 24 on the 7th, was over $111 million. 25 That ticket was a cash value option 0135 1 ticket. So it's valued at slightly over $45 million. 2 The retailer is eligible for a $500,000 bonus. My 3 staff had initial contact from a potential claimant on 4 that jackpot prize. And I did want to let you know 5 that staff is in the process of looking at and 6 examining Lotto Texas and considering some possible 7 game enhancements. And I just wanted to give you an 8 update about that as well. 9 CHAIRMAN COX: Okay. Robert -- 10 MR. TIRLONI: Yes, sir? 11 CHAIRMAN COX: -- I'm looking here at an 12 article that appeared -- This is in chron.com, which I 13 think is the on-line version of the Houston Chronicle. 14 The headline is, "Lottery Ticket Sales Paltry Despite 15 Record Jackpot." Are you familiar with that article? 16 MR. TIRLONI: I believe I read that 17 article on-line, yes. 18 CHAIRMAN COX: Okay. And here your last 19 bullet there says you're in the processes of examining 20 Lotto Texas game and considering possibilities. 21 Director Sadberry, is that process 22 related to the article in the Houston Chronicle? 23 MR. SADBERRY: Chairman, in a sense yes, 24 and is a sense it would not have a causal 25 relationship, if I may explain. 0136 1 The staff is, as I'm informed -- and 2 which I have relied on and understand to be the 3 case -- is in a constant process of evaluating game 4 enhancements and other alternatives to address the 5 sales experience that you've talked about earlier. So 6 that is an ongoing process, and that process is not 7 driven by or not related to any particular news 8 article or event. 9 On the other hand, the reason for the 10 bullet I think is connected to this article in that it 11 became important that we indicate to you the fact of 12 this review process and that it also be available for 13 public knowledge, since the article would reflect 14 public interest in this matter, to indicate that we 15 are not standing still, we are constantly looking at 16 and examining potential for game enhancement. So from 17 a point of information and presentation in the 18 Commission meeting, I would say that it is related to 19 the article. 20 CHAIRMAN COX: Chairman Clowe, I think 21 that's a real good answer. I think that, one, it 22 tells me that we are constantly watching our numbers 23 and trying to keep them where they are and make them 24 better. And it also says that we're responsible -- 25 aware of and responsive to external concerns about 0137 1 those kinds of things. 2 Okay. Robert? 3 MR. TIRLONI: Commissioners, 4 Dr. Sizemore is here today to give you an update on a 5 research project that he has just completed. 6 DR. SIZEMORE: Thank you, Robert. 7 Good afternoon Commissioner, Chairman. 8 Again, I had David Sizemore, research coordinate for 9 the Texas Lottery. And I will present a brief report 10 of findings regarding a research request submitted by 11 the Commissioners having to do with understanding the 12 relationships between instant ticket sales and weather 13 conditions throughout Texas. 14 I specifically reexamined 14 15 metropolitan areas, and we conducted the analysis for 16 two months, January and February 2006, and two months, 17 January-February in 2007. Two methodological 18 approaches were essentially used to understand whether 19 and the extent to which instant sales varied by 20 weather conditions throughout the state. Those two 21 methodological approaches were a time series analysis 22 and a correlation analysis. 23 Data were drawn from the -- for weather, 24 data were drawn from the National Oceanic and 25 Atmospheric Administration's National Weather Service. 0138 1 Sales data was extracted from GTECH's material. The 2 weather variables included temperature, icing, fog, 3 percent of sky cover or cloudiness, among other 4 things. 5 You might remember that it was very cold 6 earlier this year in January. From January 14th and 7 the 20th, 2007, temperatures dropped precipitously in 8 Texas, averaging on the 16th about 28 degrees 9 Fahrenheit. Arguably, that cold snap had an effect on 10 sales. 11 The first chart I present to you is a 12 time series analysis. The pink line is per capita 13 instant ticket sales. We had to multiply these by 100 14 to give you a sense, a measurable sense to make the 15 data equivalent, essentially, for the chart's purpose. 16 CHAIRMAN COX: What's that cycle? Is 17 that day of the week? 18 DR. SIZEMORE: It's daily sales. 19 CHAIRMAN COX: So when we see these 20 peaks and valleys, this oscillation, what are the lows 21 and what are the hights? Is that a particular day of 22 the week versus another and the lows correspond to the 23 next -- one low corresponds to the next one? 24 DR. SIZEMORE: Yes. Peaks, you'll 25 notice along the bottom axis, Sunday is the only day 0139 1 that's essentially marked out. The lows -- and this 2 is one of the patterns that we actually found that was 3 discernible and interesting. The lows are -- 4 per capita sales are lowest on Sundays. 5 CHAIRMAN COX: The peaks are 6 Saturdays -- 7 DR. SIZEMORE: Well, the peaks vary a 8 little -- 9 CHAIRMAN COX: -- the lows on Sunday? 10 DR. SIZEMORE: Peaks vary a little bit. 11 But Fridays and Saturdays -- 12 CHAIRMAN COX: Okay. 13 DR. SIZEMORE: -- tend to be peak areas, 14 which presumably could have to do with paydays 15 perhaps. 16 CHAIRMAN COX: Perhaps. 17 DR. SIZEMORE: Well, Sunday might have 18 to do with any number of things. 19 MR. TIRLONI: Just a comment. Sundays 20 are also the only day in which we don't actually have 21 a game drawing, which could be a draw for people to 22 come in to retail locations, actually purchase tickets 23 for a draw game. So they could obviously buy a ticket 24 on Sunday for a draw game, but there is no drawing, 25 which could have an impact on instant sales as well, 0140 1 because you have less people coming into the 2 locations. 3 CHAIRMAN COX: Okay. Should we have a 4 draw on Sunday? And I'm asking for history here. For 5 all I know, the leadership told us years ago they 6 didn't want a game on Sunday or they didn't or you 7 have decided it for some business reason or it's a 8 religious reason? Just kind of help me with some 9 background. 10 MR. TIRLONI: I think from a business 11 perspective only, not taking into consideration any of 12 the issues that you just raised, from a business 13 standpoint, it could have a positive impact on sales. 14 But I'm aware that there are other considerations in 15 making that decision. 16 CHAIRMAN COX: Chairman Clowe, you've 17 been here a long time. 18 COMMISSIONER CLOWE: I wouldn't want a 19 drawing on Sunday -- 20 CHAIRMAN COX: Okay. 21 COMMISSIONER CLOWE: -- Mr. Chairman. I 22 think that's a live wire. Stay away from it. 23 CHAIRMAN COX: Okay. Thank you very 24 much. 25 Go ahead, David. 0141 1 DR. SIZEMORE: The next line is average 2 temperature. And I didn't include all the variables 3 that we had here, just two of the major ones, and that 4 is average temperature and percent of cloud cover. 5 And you can see a great deal of variability with 6 reference to temperature for those two months, January 7 and February in each of the two years, 2006 and 2007. 8 There isn't a great deal to glean from 9 these time series. Temperatures all over the map, and 10 sales don't necessarily follow any particular 11 trajectory associated with temperature. 12 Percent cloud cover is equally all over 13 the map. Some days are very cloudy; some days are not 14 as cloudy. 100 percent -- the marker on the right is 15 a 100-degree gauge, for example. The higher the green 16 line or the closer to 100 that green line is, the more 17 cloud cover there was. In other words, it was a very 18 cloudy day for most of the day. The lower the line, 19 the less cloud cover. 20 So on that Sunday, somewhere toward the 21 middle or early part of February 2006, it was a very 22 sunny day, as opposed to a very cloudy day here. This 23 chart doesn't tell us a whole lot about the 24 relationships between weather and sales across the 14 25 metropolitan areas. 0142 1 CHAIRMAN COX: That is an under- 2 statement. 3 (Laughter) 4 DR. SIZEMORE: Yes, it is. Well, we did 5 a couple of other thing. And we looked at sales -- 6 before I get to that chart -- we looked at sales also 7 in an aggregate for all the 14 metropolitan areas, and 8 we correlated these variables together with instant 9 ticket sales. We didn't really find a great deal of 10 significant relationships between these variables 11 across the board. A couple of things turned out to be 12 significant statistically, but the relationship was so 13 small that it was inconsequential. 14 As a consequence, no discernible pattern 15 emerged from any of this data, beyond the fact that 16 sales fall typically on Sundays, and this seems to be 17 the case across the board. Similarly, correlation 18 analysis for the four months yield did nothing 19 particularly interesting. When we look at things in 20 the aggregate, it's difficult therefore to draw 21 conclusions from any of this data. 22 When disaggregating the data, however, 23 across the metropolitan areas, a slightly different 24 image emerged. And here we could argue that regional 25 weather patterns do have some important understanding 0143 1 as to ticket sales variations. And we conducted only 2 correlation analysis at this point. We did find 3 positive correlations in the 2007 data between per 4 capita instant sales and temperature in Amarillo, 5 Austin, Brownsville, El Paso and San Antonio, 6 suggesting between the two months in 2007, as the 7 temperature went up, sales went up. 8 We also found a positive association in 9 Dallas and Waco between sales and increasing levels of 10 fog. I'll leave that to you to interpret. I don't 11 know what to say about that. 12 CHAIRMAN COX: Chairman Clowe, you live 13 is Waco. Do you have anything to say? 14 (Laughter) 15 DR. SIZEMORE: Just something about the 16 fog? 17 COMMISSIONER CLOWE: Some of us in Waco 18 are in a fog all the time. 19 (Laughter) 20 COMMISSIONER CLOWE: We have to cut 21 through that fog. I guess they're just more 22 aggressive. 23 (Laughter) 24 COMMISSIONER CLOWE: I think the answer 25 is "I don't know." 0144 1 DR. SIZEMORE: Sales in San Antonio were 2 associated negatively with precipitation and icing, 3 and icing with reference to the National Weather 4 Service is defined as ice pellets glazed or rime. 5 You'll recall, of course, in Austin we had a couple of 6 ice days that closed things down. Everyone is 7 familiar with what this is, I suppose. 8 The sales in El Paso were associated 9 negatively with fog visibility and percent cloud 10 cover. The less cloud cover, the greater the sales in 11 this case. 12 CHAIRMAN COX: David, let me ask you if 13 you would kind of move to the bottom line on this. 14 What we were looking for when -- what I was looking 15 for when I asked for this was, is there any way to 16 estimate how much the bad weather we had in February 17 affected sales? And I guess if you could answer that 18 for me, I would be where I need to be on this. 19 DR. SIZEMORE: In terms of sales volume? 20 In other words -- 21 CHAIRMAN COX: Did the weather affect 22 how many tickets we sold, or didn't it? 23 DR. SIZEMORE: Yes. Particularly for 24 those couple of days that were iced around the -- 25 CHAIRMAN COX: And can you give us a 0145 1 number? 2 DR. SIZEMORE: No, not right now. 3 CHAIRMAN COX: So you think that the 4 weather did have an impact, for reasons that are 5 intuitive to us -- 6 DR. SIZEMORE: Right. 7 CHAIRMAN COX: -- people weren't out as 8 much; people might not have been going to convenience 9 stores because cold beer isn't all that good when it's 10 cold, those kinds of reasons. 11 DR. SIZEMORE: Right. 12 CHAIRMAN COX: But you can't put a 13 number on it? 14 DR. SIZEMORE: Not at this time. 15 CHAIRMAN COX: Okay. 16 DR. SIZEMORE: The best we could do is 17 say that the days when it was closer to normal 18 temperature, sales didn't seem to vary significantly 19 from the year before; whereas, when the temperature 20 dropped and we had the days where everything was 21 closed now, the per capita sales did seem to fall off. 22 CHAIRMAN COX: So where we end up with 23 this is that the cold weather probably is part of 24 the -- one of the reasons why our sales are down. We 25 don't know how much, and it's certainly not the only 0146 1 reason. Is that kind of where, from our standpoint, 2 we are? 3 DR. SIZEMORE: That would be fair, yes. 4 And this chart actually gives you a sense of what 5 per capita sales look like on those days when it was 6 very cold, across four of the areas where we found 7 some significant relationship going on, especially 8 with reference to the icing thing, although I would 9 caution interpretations about icing. We used a 10 dichotomous variable, zero and one. Either there was 11 or was not ice. 12 And we're talking about averages here, 13 and it's hard to glean anything from something that's 14 dichotomous with reference to average differences. 15 But, nonetheless, you do see that, for example, on 16 Friday, January 12th in Amarillo, it was 27 degrees, 17 still cold -- right? -- but it dropped 11 degrees in 18 one day, and sales fell off quite a bit. And they 19 stayed, for at least a couple of days, stayed down 20 there. But again, the Sunday issue has to be 21 highlighted here, that this cold snap was also around 22 Sunday when sales tend to decline anyway. 23 CHAIRMAN COX: Okay. Well, I appreciate 24 this report. And as you have time, I hope you'll 25 continue and see if you can develop a number for us on 0147 1 this kind of thing. 2 DR. SIZEMORE: I'll try. 3 CHAIRMAN COX: Good. 4 COMMISSIONER CLOWE: Thank you. 5 MS. PYKA: We have nothing further. 6 CHAIRMAN COX: Okay. Thank you very 7 much. 8 Any questions? 9 COMMISSIONER CLOWE: No, sir. 10 CHAIRMAN COX: Okay. 11 AGENDA ITEM NO. XI 12 CHAIRMAN COX: Item XI, report, possible 13 discussion and/or action on transfers to the state and 14 the agency budget. 15 Ms. Pyka. 16 MS. PYKA: For the record again, my name 17 is Kathy Pyka, Controller for the Lottery Commission. 18 Tab XI includes information on the 19 agency's financial statutes. The first report 20 includes the transfers and allocations to the 21 Foundation School Fund, the allocation of unclaimed 22 prizes as of March of 2007. Our total transfers to 23 the state amounted to $605.1 million for the first 24 seven months of fiscal year '07. And this represents 25 a minimal decrease from the actual transfers the 0148 1 previous fiscal year. 2 The second page in your notebook 3 reflects the detailed information of the monthly 4 transfers of the $605.1 million transfer to the state. 5 $574 million of that was to the Foundation School 6 Fund, with a balance of $31.1 million transferred for 7 unclaimed lottery prizes. 8 The fourth document in your notebook 9 includes our cumulative lottery sales, expenditures 10 and transfers from fiscal year 1992 to the present and 11 reflects through March of this year total transfers to 12 the Foundation School Fund of over $9.2 billion. 13 The next item I have under this tab is 14 our quarterly update on the agency's fiscal year 2007 15 operating budget. This represents data through 16 February 28th of 2007. The Commission's lottery 17 budget funded out of dedicated funds for fiscal year 18 '07 is $180.4 million. Of this amount, 44.7 percent 19 is expended through the first quarter. 20 And our bingo operations budget, funded 21 out of the general revenue fund, is $13.5 million. 22 And as of February 28th, we've expended 51.1 percent. 23 And the reason for the slight increase in bingo is 24 because of the allocations, the quarterly allocations 25 that have been performed. We'll be doing an estimated 0149 1 budget amendment at the end of the fiscal year to 2 increase that estimated appropriation 3 I have nothing further on this item, 4 unless you have questions. 5 CHAIRMAN COX: Thank you. 6 AGENDA ITEM NO. XIII 7 CHAIRMAN COX: Item XIII, report, 8 possible discussion and/or action on fiscal year 2008 9 and '09, legislative appropriation request. 10 MS. PYKA: Do we want to do XII or skip 11 to XIII? 12 CHAIRMAN COX: Pardon me? 13 MS. PYKA: XII? 14 CHAIRMAN COX: I just checked off XII. 15 It must be done. 16 MS. PYKA: We did XI. 17 CHAIRMAN COX: Okay. Well, since you're 18 there, let's do XIII, then we'll do XII. 19 MS. PYKA: Okay. I'll scoot back to 20 this chair. I have a PowerPoint on that one. 21 Tab XIII. Again, for the record, Kathy 22 Pyka, Controller. 23 Tab XIII is a brief report on our fiscal 24 year 2008-2009 legislative appropriations request. 25 And I provided you an updated document for Tab XIII 0150 1 this morning that includes all the activities through 2 April 10th of last week, which is when the Senate took 3 action on the budget. I wanted you to have the most 4 current information. 5 To date we've appeared before the House 6 Appropriation Committee and the Senate Finance 7 Committee for budget markup consideration. House Bill 8 1 was considered and voted on by the House on 9 March 30th. And the senate voted on the committee's 10 substitute for House Bill 1 on the 12th of April. 11 As outlined on Attachment A, I would 12 like to give you just an overview of where our budget 13 stands as we submitted it to the Legislature. The 14 first item, we had a budget decrease. The LBB 15 actually included as a global policy of recommending 16 salaries at fiscal year 2007 base levels. That budget 17 decrease of $902,000 has not been included in either 18 the House or the Senate version of the budget. 19 The second item was the across-the-board 20 budget reduction that all agencies encountered. Our 21 amount was $456,000. And the House did not include it 22 in their budget, but the Senate included it in their 23 base budget. So that will be a conference committee 24 item. 25 Our next item, the increase to the 0151 1 exempt position, we had asked for the full range of an 2 exempt position Salary Group 6. That item is 3 reflected in two places in the House budget, both in 4 Article IX, which are items for future consid- -- 5 excuse me -- Article XI, items for future 6 consideration. 7 And in the Senate version, we have it in 8 the base budget at $125,000, along with an Article IX 9 provision in the base budget, which allows us the 10 ability to request the full range of a Salary Group 6. 11 That item will definitely be discussed further in 12 conference committee, since there are some differences 13 between the two bills. 14 Our capital budget request items, we had 15 three items, one for hardware and software upgrades, 16 the second for the computer room air conditioning 17 system, and the third for a piece of equipment to be 18 used in our lottery operations area. Those three 19 items have not been included in either the House or 20 the Senate version of the budgets. 21 And then we asked for the new Rider 701, 22 Lottery Operator Plan B. That was included in the 23 base budget of the House but not in the Senate, 24 definitely will be conference committee 25 The bingo indirect rider was included in 0152 1 the House budget under items for future consideration, 2 and that item is awaiting for the movement of the 3 legislation to go with that, which was passed out of 4 the House Licensing and Administrative Procedures 5 Committee. So we just need to get that legislation 6 through the full chamber. 7 Our unspent admin fund rider is in the 8 House budget but not in the Senate budget. We don't 9 have action on the out-of-state traveler rider at all 10 in either budget. Rider 13 increased appropriation. 11 Both budgets have reflected the revised BRE issued by 12 the Comptroller's office, which includes fiscal year 13 2008 sales at $3.934 billion and fiscal year 2009 14 sales at $ billion. 15 CHAIRMAN COX: Okay. Now, that's not 16 the number we sent in? 17 MS. PYKA: That is not the number we 18 sent in. We sent in $3.8 billion. And so that's a 19 significant increase in sales that we would have to 20 reach in order to utilize that rider of increased 21 appropriation. 22 CHAIRMAN COX: Okay. Now, what kind of 23 impact does that have on how we run the lottery? 24 MS. PYKA: The impact to us is, as we 25 reach a point in time that maybe we want to do new 0153 1 market initiatives and we need to tap into some 2 additional appropriation line items, we'll not be able 3 to do that unless we reach those sales levels. And 4 where we are with today's sales, I think it's unlikely 5 that we'll get to 3.9 or $4 billion in fiscal year 6 '08-09. 7 CHAIRMAN COX: Okay. And I've been to 8 some of those meetings, and I know y'all have been to 9 a lot more. And we've explained that to folks. 10 MS. PYKA: Yes, we have. 11 CHAIRMAN COX: Okay. 12 MS. PYKA: The next item, increase to 13 Strategy A.1.7, instant ticket printing, the Senate 14 has included an additional appropriation of $3 million 15 dollar per year of the biennium, providing us a 16 contingency rider upon adoption of rules by this 17 Commission on instant game closing. And these dollars 18 will be used for any additional print costs we might 19 encounter as a result of closing games on a more 20 frequent basis. 21 And then finally, the House -- 22 CHAIRMAN COX: Kathy, would it justify 23 printing costs? Or there are other costs of closing 24 games more frequently. Would it cover some of those, 25 too? 0154 1 MS. PYKA: This includes printing only. 2 It's specific to that contractual line item. 3 CHAIRMAN COX: Thank you. 4 MS. PYKA: And then the last item on 5 this list is, the House did include a new rider as a 6 floor amendment that states that, "none of the funds 7 appropriated to the Lottery Commission may be spent 8 for the purpose of exploring, investigating, 9 negotiating, calculating or otherwise taking any 10 action that would result in selling the Texas Lottery. 11 That rider is in the House version of the base bill 12 but not in the Senate version. I just wanted to note 13 that. 14 And then I also -- 15 COMMISSIONER CLOWE: I have a question 16 about that, Mr. Chairman. 17 CHAIRMAN COX: Yes, sir. 18 COMMISSIONER CLOWE: Is it somebody's 19 interpretation -- I don't know whose -- that if this 20 rider were adopted, that this agency could not act as 21 a resource in any way in regard to that issue if it 22 were asked do so? 23 MS. PYKA: I'm not certain if Kim would 24 like to assist on that interpretation or . . . 25 MS. KIPLIN: I don't know if -- the 0155 1 agency has, you know, one interpretation. I think 2 it's fairly strong language. I think it's meant to 3 not have this agency act in any way in connection with 4 the use of appropriated resources. I think staff are 5 paid by appropriated funds, so I think it goes 6 certainly to that. The operative language on that is 7 "selling of the lottery." Some may want to focus in 8 on selling the lottery, what does that mean, versus 9 another activity short of selling the lottery? 10 COMMISSIONER CLOWE: Well, let's say 11 that the intent of the law is to prohibit the agency 12 from in any way being involved as a resource in the 13 selling or leasing or any other financial arrangement 14 that would affect the lottery. I'm trying to get some 15 clarification that will help this agency, if 16 legislation is passed, when it gets a request for it 17 to act as a resource in regard to this activity, 18 whether it's selling, leasing or whatever. 19 In the past, this agency, like any other 20 agency, when it's called on by a committee, a member 21 of the Legislature, a member of the leadership, has 22 done its best to provide assistance. And is it your 23 interpretation that if this would pass, this agency 24 would be prohibited from participating in whatever the 25 scope of the language of the legislation was that was 0156 1 adopted? 2 MS. KIPLIN: I hear the question. What 3 I would like to do is not respond directly on what my 4 interpretation is. I would like to look at that 5 language. I would like to go back, take a look and 6 listen to the -- I don't know who put that rider on. 7 MS. PYKA: Representative -- 8 COMMISSIONER CLOWE: It doesn't make any 9 difference. 10 MS. KIPLIN: But it -- 11 COMMISSIONER CLOWE: It doesn't make any 12 difference. 13 MS. KIPLIN: Well, I want to identify 14 it, because I want to listen to -- 15 COMMISSIONER CLOWE: Okay. 16 MS. KIPLIN: -- why that rider got put 17 in, the exchange among the members. 18 COMMISSIONER CLOWE: That does make a 19 difference. 20 MS. KIPLIN: It makes a difference in 21 terms of what was the intent. And so I want to be 22 responsive to you, but I want to be very careful about 23 what that response is. I think it's pretty strong 24 language. 25 COMMISSIONER CLOWE: It is. And it 0157 1 signals a legislative intent. And I think you're 2 right in wanting to go back and listen to that, that 3 we should be mindful of here. This agency in the past 4 was responsive to an inquiry as a resource, and it was 5 criticized, I think, is a fair thing to say, in trying 6 to be responsive and, in my opinion, operated within 7 the bounds that were proper and correct and legal. 8 And we got caught up in a fight that wasn't ours, 9 really. And I'm seeing something similar to that in 10 this, and I want the agency to be aware of it and 11 responsive to it. 12 I might ask you to just put my question 13 on hold until this matures and develops. And if you 14 see it moving towards adoption, to then delve into it. 15 In the meantime, be aware of a concern that I'm 16 expressing and just let it sit there and see if it 17 ripens to maturity 18 MS. KIPLIN: I will. I don't want to 19 appear to be evasive, but I want to be very careful 20 about the analysis. 21 COMMISSIONER CLOWE: You're not evasive 22 at all. And maybe my question is too early. But I 23 want it to rest on the table pending disposition of 24 this rider. 25 MS. KIPLIN: I will take that, put it in 0158 1 my mind, and we'll monitor that. It is a rider in the 2 bill pattern, I believe, on -- 3 MS. PYKA: It's within our Article VI 4 bill pattern -- I mean, excuse me -- Article VII bill 5 pattern and our direct appropriation bill pattern. 6 MS. KIPLIN: House or Senate? 7 MS. PYKA: House. 8 MS. KIPLIN: House side. So I'll keep 9 up with the Governmental Affair Folks within the 10 agency. 11 COMMISSIONER CLOWE: And I want it on 12 the record that the agency is aware of this proposed 13 rider and it's mindful of what the intent would be and 14 that we're going to watch it carefully and conform 15 with whatever direction the Legislature gives us. 16 MS. PYKA: Commissioners, I would like 17 to also share with you some other provisions included 18 in Article IX of the Senate version of the budget 19 bill, because these provisions will impact our 20 baseline budget as well, if adopted, the first being 21 Section 18.1, provides additional appropriation and 22 authority to all state agencies for merit pay 23 appropriation of one percent of actual fiscal year 24 2007 salaries. This will be a new appropriation of 25 one percent per year. This will be an additional 0159 1 appropriation item that would assist in addressing 2 that shortfall of $902,000 that we did not get 3 restored. 4 Section 18.06 requires an across-the- 5 board reduction to all state agencies and institutions 6 of higher education, and this reduction is to meet the 7 funding requirement of the Medicaid settlement. The 8 reduction is approximately .59 percent of all GR and 9 GR-dedicated appropriation. This amount definitely is 10 subject to change. It will be a conference committee 11 item, so we'll be watching this closely. 12 And then finally, Section 18.08 includes 13 an across-the-board reduction of FTEs and 14 appropriation across state agencies and institutions 15 of higher education, to derive an additional $100 16 million reduction. And the Comptroller's office and 17 the LBB will be providing the methodology to all state 18 agencies and hire out how to calculate that reduction. 19 So we are definitely faced with some potential budget 20 reductions in those areas. 21 This concludes my presentation. I would 22 be happy to answer any questions. 23 CHAIRMAN COX: Okay. I realize we 24 skipped Item XII. I have been asked to not run 25 sessions more than an hour and a half, and I've just 0160 1 gone more than an hour and a half, Mr. Chairman. So 2 why don't we take about a 10-minute break. 3 (Off the record: 12:31 p.m. to 12:39 4 p.m.) 5 CHAIRMAN COX: Okay. Let's come back to 6 order. 7 AGENDA ITEM NO. XII 8 CHAIRMAN COX: Item XII, report, 9 possible discussion and/or action on Lottery 10 Operations and Services contract Amendment No. 8 11 credit calculation. 12 Ms. Pyka. 13 MS. PYKA: Commissioners, for the 14 record, Kathy Pyka, Controller of the Lottery 15 Commission. 16 I have an update for you on Contract 17 Amendment No. 8 of the Lottery Operations and Services 18 contract and the amount due on the Commission for the 19 second quarter of fiscal year 2007. 20 Section 10.3.3 of the contract provides 21 an annual credit to the Commission equal to 12 percent 22 of GTECH's annual incremental revenue from sales over 23 the previous fiscal year for every .1 percent increase 24 in prize payout percentage for both our on-line and 25 instant games. 0161 1 While we experienced an overall increase 2 in prize payout for the second quarter of '07, there 3 is not a credit due under this section of the 4 contract, as there was a decline in sales from fiscal 5 year 2006. 6 Section 10.3.4 of this amendment 7 requires GTECH provide an annual credit equal to 4.5 8 percent of the year-over-year decline in dollar 9 returns to the state if sales remain flat or decline 10 and if the prize payout increases by more than 11 .1 percent. So under this provision of the contract, 12 we're due a credit of $659,929 for the second quarter 13 of fiscal year 2007. 14 The overhead before you shows that for 15 the second quarter of '06, we had total sales of a 16 million 16.3 as compared to fiscal year 2007 sales for 17 the second quarter of $956.1 million, so a decline in 18 sales of $60.2 million, a prize payout increase from 19 62.6 percent to 62.8 percent. And our dollar returns 20 to the state declined from $258.5 million to 21 $243.8 million, a decline of $14.7 million. So in 22 this case, the credit calculation is the $600,000. 23 I wanted to note per the contract, 24 excluding fiscal year 2007, the credit under this 25 section will not exceed $1.2 million in any state 0162 1 fiscal year. Fiscal year 2007, the credit cannot 2 cause GTECH's net revenue to fall below fiscal year 3 2006 net revenue. It is likely that due to the 4 current rate, fiscal year 2007 will not be able to 5 retain any of the credits we have received to date 6 under this provision of the contract, as we expect 7 that GTECH's net revenue will not fall below the 8 fiscal year 2006 level. 9 A copy of the credit calculation is 10 included in your notebook. And I will be happy to 11 answer any questions you might have. 12 CHAIRMAN COX: Questions? 13 COMMISSIONER CLOWE: None. 14 CHAIRMAN COX: So what I hear is that 15 we're paying back more to keep sales up, to keep 16 GTECH's fee up. But because sales are, on an absolute 17 basis, down, we don't get the credit? 18 MS. PYKA: We don't get the credit 19 because of sales being down. 20 CHAIRMAN COX: And we're partners, huh? 21 MS. PYKA: The limitation is on our 22 fiscal year 2007. When we get beyond this year, it 23 will be a limitation of $1.2 million per fiscal year. 24 CHAIRMAN COX: So this limitation is 25 this year only? 0163 1 MS. PYKA: And then it goes up -- it 2 will be a $1.2 million in future years. 3 CHAIRMAN COX: Okay. So the sharing of 4 risk was illusory? 5 MS. PYKA: Under this provision of the 6 contract, I don't expect we'll be able to retain any 7 of the dollars this fiscal year. 8 CHAIRMAN COX: Thank you, Ms. Pyka. 9 AGENDA ITEM NO. XIV 10 CHAIRMAN COX: Okay. Item XIV, report, 11 possible discussion and/or action on the 80th 12 Legislature. 13 Ms. Trevino? 14 MS. TREVINO: Good afternoon, 15 Commissioner. For the record, I'm Nelda Trevino, the 16 Director of Governmental Affairs. 17 And we have provided you today with an 18 updated legislative tracking report listing the bills 19 filed with potential impact to the agency. We're 20 currently tracking 149 bills, and I would like to 21 provide you the status of 11 bills today that directly 22 impact the Lottery or Charitable Bingo. 23 First, House Bill 1179 by Rep. Kino 24 Flores. This amends the Lottery Act, to remove the 25 agency's exemptions from contracting statutes and is 0164 1 consistent with one of the recommendations made by the 2 state auditor's office in their procurement audit of 3 the agency. This bill passed out of the House on 4 April the 13th and has been received in the Senate for 5 their consideration. 6 CHAIRMAN COX: That was a recommendation 7 by the state auditor, and we concurred in that 8 recommendation? 9 MS. TREVINO: That's correct. 10 Houston Bill 1180, also by Rep. Kino 11 Flores. This changes the agency's sunset date from 12 2011 to 2009. And this bill passed out of the House 13 on April the 10th and has also been received in the 14 Senate for their consideration. 15 House Bill 2739 by Rep. Chente 16 Quintanilla amends the Lottery Act to allow the sale 17 of lottery tickets at bars and restaurants. And this 18 bill was considered and voted favorably by the House 19 Licensing Committee. 20 Several bingo-related bills were 21 recently -- 22 CHAIRMAN COX: Let me ask you about that 23 bill, Nelda. 24 MS. TREVINO: Yes, sir. 25 CHAIRMAN COX: That would permit the 0165 1 sale of lottery tickets in establishments with 2 on-premises -- 3 MS. TREVINO: On-premise liquor license. 4 CHAIRMAN COX: -- liquor license? 5 MS. TREVINO: That's correct. 6 CHAIRMAN COX: Does it -- and Director 7 Sadberry, maybe this is for you or someone else on 8 your staff. Does it permit other games such as keno 9 or is it just traditional lottery products? 10 MS. TREVINO: It does not authorize a 11 keno or other type of lottery. It strictly just 12 removes the current provision in the Lottery Act that 13 prohibits the sale of tickets at these type of 14 locations. 15 CHAIRMAN COX: Okay. Ms. Kiplin, if 16 this were to pass, would the law, the existing Lottery 17 Act, permit sale of a keno game or other 18 non-traditional lottery products in these venues? 19 MS. KIPLIN: The State Lottery Act is 20 silent as to keno. And I would not want to answer 21 that off the cuff. I think the information that's 22 been connected with this particular bill has to do 23 with only opening up new venues, not authorizing 24 anything which is not already authorized. 25 CHAIRMAN COX: Okay. 0166 1 MS. TREVINO: Chairman Cox, I would add 2 to that, that in the past, we have received some input 3 from members or leadership in the past that have 4 indicated that there would need to be some clear 5 expressed authority in the Lottery Act for a keno 6 style game. 7 Again, several bingo-related bills were 8 recently considered and also voted favorably by the 9 House Licensing Committee. And these include House 10 Bill 1156 by Rep. Kino Flores. And this bill includes 11 some general provisions related to the regulation of 12 bingo and also includes some provisions to streamline 13 the licensing process 14 House Bill 2206 by Rep. Pat Haggerty. 15 This bill authorizes the use of card-minding devices 16 to display and play a pull-tab ticket. 17 And House Bill 2265, also by Rep. Pat 18 Haggerty. This bill relates to prizes awarded in the 19 progressive bingo game. And, again, these three 20 bingo-related bills were considered and voted 21 favorably by the House Licensing Committee. 22 House Bill 3186 by Rep. Jose Menendez 23 authorizes poker gaming in the state and creates a 24 poker gaming provision at the Lottery Commission for 25 the regulation of these activities. And this bill was 0167 1 considered by the House Licensing Committee and has 2 been left pending in committee. 3 House bill 3350 -- 4 CHAIRMAN COX: Nelda, how would the 5 structure of that poker gaming division be? 6 MS. TREVINO: I don't have the -- 7 CHAIRMAN COX: Would it report to the 8 Executive Director or to the board? 9 MS. TREVINO: Chairman Cox, I'm going to 10 go off memory, because I don't have the bill in front 11 of me. But my recollection is, is that it is a 12 separate agency that would have a director for that 13 division, and that director would report directly to 14 the Commission. 15 CHAIRMAN COX: Okay. Thank you. 16 MS. TREVINO: House Bill 3350 by Rep. 17 Charlie Geren. This amends the Lottery Act to allow 18 the use of the Lottery account for all Commission 19 expenses. And this bill was considered and also voted 20 favorably by the House Licensing Committee. 21 Senate Bill -- 22 CHAIRMAN COX: Is that the bill that 23 would address the issue of whether we can pay for 24 bingo support out of appropriated funds? 25 MS. TREVINO: That's correct, Chairman 0168 1 Cox. And, as Kathy mentioned, there is a rider in the 2 House version of the bill, under items for future 3 consideration for the pending -- contingent upon the 4 passage of legislation. So this would be the 5 legislation that would need to pass in order for that 6 rider to basically come into effect. 7 Senate Bill 1200 by Sen. Dan Patrick. 8 This is the bill that conforms with what the 9 Commission has just put in practice as it relates to 10 the closing of instant games. This bill requires the 11 Lottery Commission to adopt rules to close instant 12 games after top prizes in the game have been claimed, 13 or on an earlier date, as determined by the Executive 14 Director, and also requires procedures that would end 15 the sale of instant games beyond the 46th day after 16 the game has been closed. And this bill was 17 considered and voted favorably by the Senate State 18 Affairs Committee last week and has been placed on the 19 Senate intent calendar for the full Senate's 20 consideration. 21 Senate Bill 1751 by Sen. Royce West. 22 This bill authorizes the sale of lottery tickets over 23 the Internet. And this bill was heard earlier this 24 week in the Senate State Affairs Committee and has 25 been left pending in committee 0169 1 Senate Bill 1110 by Sen. John Carona 2 relating to the use of a card-minding device to play 3 bingo will be considered by the Senate State Affairs 4 committee at their hearing tomorrow. 5 With regard to the appropriations bill 6 for the 2008-2009 biennium, Kathy did provide you a 7 report on the differences between the agency's 8 appropriations adopted by the House and the Senate and 9 a conference committee comprised of House and Senate 10 members appointed by the Speaker and the Lt. Governor 11 will be formed to resolve all the differences between 12 the two versions. 13 And the House conferees were appointed 14 yesterday, and they include Reps. Warren Chisum, Dan 15 Gattis, Ryan Guillen, Lois Kolkhorst and Sylvester 16 Turner. And we anticipate the Senate to appoint their 17 conferees either today or tomorrow. 18 The last day of the regular session is 19 May the 28th. And once the legislative session 20 concludes, the Governmental Affairs division will be 21 working with the other divisions to coordinate the 22 implementation of legislation that is enacted. 23 And this concludes my report, and I'll 24 be happy to answer any questions. 25 CHAIRMAN COX: No questions. 0170 1 MS. TREVINO: Thank you. 2 AGENDA ITEM NO. XV 3 CHAIRMAN COX: Item XV, consideration of 4 and possible discussion and/or action on the lottery 5 operator contract, including approval of an amendment 6 to the lottery operator contract and/or whether the 7 negotiation of the lottery operator's contract in an 8 open meeting would have a detrimental effect on the 9 Commission's position in negotiation of the lottery 10 operator contract. 11 Mr. Fernandez. 12 And I guess first, Chairman Clowe, we 13 should deliberate whether we want to deliberate this 14 in public or not. What is your preference? 15 COMMISSIONER CLOWE: I would think we 16 would. 17 CHAIRMAN COX: And I concur with that. 18 MR. FERNANDEZ: Good afternoon, 19 Mr. Chairman, Commissioner. My name is Mike 20 Fernandez. I'm the Director of the Administration 21 Division. With me this afternoon I have Ms. Debbie 22 Pina who is the contract specialist with the Support 23 Services Department. 24 What we are here to do today is to 25 apprise you of a proposed amendment to our lottery 0171 1 contract operator services contract. This will be 2 Amendment No. 9. And it basically has three 3 provisions in the amendment. Two of the provisions 4 are language clean-up, I think is probably the 5 appropriate term. And what that is doing is 6 standardizing language. 7 One of the provisions is in reference to 8 Section 10.3.3 of the contract, is added by Amendment 9 No. 8. And, as you know, Commissioners, that section 10 is the annual credit, based on increased and overall 11 prize payout percentage. What we're doing here is, 12 we're standardizing -- we're standardizing the 13 definition of GTECH's revenue from sales, as is 14 defined elsewhere in our contract. 15 The other is a change that has also to 16 do with the sales definition, and that's in the 17 glossary of terms. And what we're doing again is, 18 we're standardizing the language of sales by adding to 19 that reference any less -- any retailer adjustments. 20 So those are two standard language 21 changes that brings this, all our language into 22 conformity, if you will, across the board. 23 The last change is in Section 4.4.1 of 24 the contract, is added by Amendment 8. And what that 25 has to do with is with the background checks of GTECH 0172 1 employees. And what this amendment does is, it allows 2 GTECH to hire employees in the State of Texas but does 3 not allow them to work on the Texas Lottery account or 4 in any capacity until such time that they have a 5 complete background check that's been approved and 6 accepted by the Lottery Commission. 7 So those are the three changes, proposed 8 changes in Amendment 9. 9 CHAIRMAN COX: Director Sadberry, I 10 believe the contracting authority sits with you. What 11 are you asking here? 12 MR. SADBERRY: Well, Commissioners, I 13 think you're correct from my understanding, subject to 14 General Counsel's assistance in that interpretation. 15 However, I believe there has been a practice regarding 16 certain major contracts, that the Executive Director 17 receive direction, guidance or other appropriate 18 terminology that might apply from the Commission with 19 respect to the contracting authority of the ED. And I 20 believe the GTECH contract is one of those contracts 21 that it applies to. 22 Now, whether that's an action item or 23 just for general discussion would have to be advised 24 by counsel. I will tell you that on this one, I 25 believe there are some additional internal matters 0173 1 within the agency, I believe, where the internal 2 auditor is concerned -- if I may speak. I know she's 3 here present and can speak for herself -- concerning 4 some security aspects of the last component that 5 Mr. Fernandez spoke to concerning the background 6 checks that would need to occur. 7 But in my mind, that's a procedural 8 matter. I guess the question becomes from a policy 9 standpoint of whether the Commission wishes to give 10 direction to the ED with respect to an amendment of 11 this nature. I can give you a little background from 12 my understanding of it, subject to being clarified. 13 This contract provision, which exists in 14 Contract Amendment No. 8, derives from the state 15 auditor's office with respect to the security aspect 16 of GTECH employees in Texas. And I believe Contract 17 Amendment No. 8 is perceived to have perhaps gone too 18 far in the direction of requiring background checks on 19 all employees of GTECH who work in the State of Texas, 20 whether or not they have some relationship with the 21 Lottery. 22 And I think this is intended to be a 23 pragmatic balance to GTECH's ability to operate 24 business without having to have all their employees, 25 particularly those who are not working on lottery 0174 1 systems, to go through a background check, because of 2 the delay and other factors that go into that 3 consideration. 4 Now, that possibly is a policy question, 5 and that would be brought to your attention on that 6 basis. Otherwise, it would be the general approach of 7 whether you have direction to the ED on whether this, 8 you know, contract amendment would meet with your 9 approval should the ED decide to sign it. 10 COMMISSIONER CLOWE: Mr. Chairman, I 11 have been briefed on this by Mr. Fernandez, and I 12 don't have any problem with the first two items. I 13 think they're housekeeping in nature. 14 I really haven't had the time to look 15 into that third issue. And I would appreciate the 16 opportunity to pass this item until our next meeting 17 and have an opportunity to feel better able to give 18 the direction the Executive Director is asking for, if 19 that's agreeable with you. 20 CHAIRMAN COX: That's completely 21 agreeable. I have been briefed as well. As I hear it 22 laid out today, however, I thought of additional 23 questions that I would like to have answered. 24 And, Mike, I'll just lay them out for 25 you. 0175 1 MR. FERNANDEZ: Yes, sir. 2 CHAIRMAN COX: One, it seems to be one 3 thing to determine whether a person is working for 4 GTECH in Texas or not and quite a bit more complex 5 matter to determine whether they're working in Texas 6 on Texas stuff. You know, we can go do a head count 7 out there and ask for ID and see if everybody has been 8 investigated. But I don't think we can go look over 9 their shoulder and say, "Aha! You're working on Texas 10 stuff." 11 So I see us introducing a degree of 12 complexity here as far as our monitoring activities. 13 And I can't see anything we're getting for this. It 14 looks to me like this is totally for the benefit of 15 GTECH. So if there are any benefits to the Texas 16 Lottery from this, I would like to know what those 17 are. 18 And then the other thing I would like to 19 know is, in other states, are there people working on 20 Texas Lottery stuff? And how do we know that they 21 have had background investigations? 22 MR. FERNANDEZ: If I may, Mr. Chairman? 23 CHAIRMAN COX: Please. 24 MR. FERNANDEZ: Two of those questions I 25 perhaps can shed some light on. One of the things 0176 1 that we did in discussions with GTECH when this 2 concern was raised after Amendment 8 was passed, was 3 to come back and take a look at that language and try 4 to discern, if you will, what's important to us an as 5 organization and our operations in security and 6 integrity. 7 And our concern was, as you point out, 8 is those folks that are touching the Texas account 9 from the GTECH side. And the perspective that we came 10 from was, those primary systems that might impact 11 again the security and integrity of the lottery. And 12 what we did is, we called upon our compliance support 13 contractor or vendor, if you will, Protiviti, to take 14 a look at that. And that was in meetings with our 15 senior staff and our internal auditor. 16 And what we ultimately identified were 17 basically five primary systems, the names of which I 18 won't speak in public, because of security reasons. 19 And of those five primary systems, there were three 20 basically that we would deem high security systems. 21 And what we asked of our compliance 22 contractor was to take a look at the five systems and 23 to give us what we believed was a level of comfort and 24 assurance that we can monitor those folks that 25 actively can come on those systems, whether they 0177 1 reside in the State of Texas or whether they reside in 2 Rome, that they have to sign onto those systems. 3 What Protiviti did was to go back to the 4 partner that was in charge of security and compliance 5 for the systems area, came back and spoke to that with 6 us and said that they had controls in place that would 7 allow for us and allow for Protiviti to monitor that. 8 What we did do is that we reconvened that group, if 9 you will, very recently, to ensure that our internal 10 auditor was also comfortable with the way that that 11 would occur. So we do believe, Commissioners, that 12 there is the ability to monitor those systems and to 13 give the agency a level of assurance that they cannot 14 touch those accounts. 15 This, just -- and you probably know the 16 background -- but this came out of an issue from 17 GTECH -- for GTECH in terms of their operations. And 18 what really brought that up to the table for us and 19 perhaps put us in a position of willingness to discuss 20 this was that, as you know, they run data support 21 services for other states, not only in terms of their 22 coding but in terms of their technical operations. 23 So that brought us to the table. And as 24 we worked through that and as we had those discussions 25 with both their staff and our staff, and what we tried 0178 1 to do was focus on people that could touch our 2 account, not only in the State of Texas but call 3 centers that, as you know, operate out of state. 4 CHAIRMAN COX: Mike, let me stop you if 5 I may. 6 MR. FERNANDEZ: Yes, sir. 7 CHAIRMAN COX: And I know you're being 8 responsive to my questions. What I really wanted was 9 that you look at those questions and be prepared to 10 address them next week -- 11 MR. FERNANDEZ: Oh, absolutely. 12 CHAIRMAN COX: -- or next meeting, as 13 Chairman Clowe suggested. 14 MR. FERNANDEZ: Absolutely. 15 CHAIRMAN COX: So that's what we would 16 like to do, I think. Okay. Thank you. 17 COMMISSIONER CLOWE: I think we can give 18 you direction on the first two items, can we not, 19 Mr. Chairman? 20 CHAIRMAN COX: The first two items Kathy 21 told me are basically to get things consistent between 22 documents. 23 COMMISSIONER CLOWE: And I don't think 24 that's an action item. We just give you an indication 25 of our feelings. 0179 1 MR. FERNANDEZ: Very good. Thank you. 2 COMMISSIONER CLOWE: Thank you. 3 AGENDA ITEM NO. XVI 4 CHAIRMAN COX: Item XVI, report, 5 possible discussion and/or action on the agency's 6 contracts. 7 Ms. Pina. 8 MS. PINA: Yes. Good afternoon, 9 Commissioner. For the record, my name is Debbie Pina, 10 Contract Administrator for the Commission. 11 Commissioners, in your notebook under 12 Tab No. XVI is a report of prime contracts that have 13 been updated for your review. Since the report was 14 submitted for the notebook, the contract for market 15 research services had been extended for one year, from 16 September 1, 2007 through August 31, 2008. 17 If you have any questions, I would be 18 happy to respond. 19 CHAIRMAN COX: No questions. 20 COMMISSIONER CLOWE: No questions. 21 AGENDA ITEM NO. XVII 22 CHAIRMAN COX: Item XVII, report and 23 possible discussion and/or action on the agency's HUB 24 program and/or minority business participation, 25 including the agency's Mentor Protégé Program. 0180 1 Ms. Bertolacini. 2 MS. BERTOLACINI: Yes. Good afternoon 3 Chairman Cox and Commissioner Clowe. For the record, 4 my name is Joyce Bertolacini, coordinator of the TLC's 5 Historically Underutilized Business Program. 6 A copy of the agency's March HUB 7 minority contracting activity report has been provided 8 to you today. I apologize for that. However, again, 9 the subcontracting data is due to me by the 10th; and, 10 therefore, because of the deadline for the notebook, I 11 could not get that report into the notebook at the 12 time it was due. 13 But you should have a copy of it now. 14 And this report includes all fiscal year 2002 15 expenditures paid from September 1st of 2006 to 16 March 31st of 2007. Our total qualifying expenditures 17 as of March 31st were $93.3 million. And our 18 estimated HUB minority utilization was approximately 19 $22.9 million, which equates to 24.55 percent. 20 In addition, the Texas Building and 21 Procurement Commission has just released its fiscal 22 year 2007 semi-annual statewide HUB report. I've also 23 provided to you today a series of summary reports 24 which analyze the TLC's HUB performance for the first 25 six months of fiscal year 2007. And I would like to 0181 1 highlight some key points for you. 2 The TLC's overall HUB utilization during 3 the first six months of fiscal year 2007 was 4 26.1 percent, as compared to 24.9 percent during the 5 same report period in fiscal year 2006. So we have 6 had an increase. 7 During fiscal year 2007, the agency 8 exceeded the goals for three report categories and 9 showed improvement in the two remaining categories. 10 The agency had a significant increase in the area of 11 commodity purchasing during this report period. 12 Although direct spending with HUB- 13 certified companies has decreased during this report 14 period, subcontracting payments made to HUB vendors 15 has continued to increase. And subcontracting 16 payments made to minority-owned HUBs have also 17 continued to rise. 18 The TLC ranked No. 11 -- we just keep 19 hanging at No. 11 -- in total expenditures captured by 20 the TBPC HUB report. 21 CHAIRMAN COX: We're just going to have 22 to get bigger to move up. 23 MS. BERTOLACINI: We're going to have to 24 get bigger and spend more money to get back up into 25 the top ten. 0182 1 Therefore, the TLC was not one of the 2 top ten largest spending agencies. However, again, 3 when compared to the ten top spending agencies, the 4 TLC ranked No. 2 by overall HUB percentage. 5 CHAIRMAN COX: That's the one that we 6 really have something to do with, isn't it? 7 MS. BERTOLACINI: Yes. But I also am 8 happy to report that during this report period, we 9 were also included on another list which is the list 10 of top 25 agencies spending more than $5 million per 11 fiscal year with the largest percentage spent with 12 HUBs. So we were included on that list as well, which 13 is a good indicator as well. 14 I don't have anything else on the 15 report. But regarding the Mentor Protégé Program, to 16 date I have received four mentor applications, and 17 I've recently distributed some applications to 18 potential protégés and have already gotten some 19 response from that. And I will continue to send out 20 additional applications during the next few weeks 21 And that's all I have today. But I 22 would be happy to answer any questions that you might 23 have. 24 COMMISSIONER CLOWE: And who are the 25 mentor applications from, please? 0183 1 MS. BERTOLACINI: They're from GTECH, 2 Scientific Games, Davila -- I know I'm going to say it 3 wrong -- Davila Schaubaut and Tracey Locke. I have to 4 try not to say DDD Dallas anymore on that one. So 5 those are the four. 6 COMMISSIONER CLOWE: We appreciate those 7 applications. 8 CHAIRMAN COX: We do indeed. 9 MS. BERTOLACINI: Yes, we do. 10 CHAIRMAN COX: Thank you very much. 11 MS. BERTOLACINI: Thank you. 12 AGENDA ITEM NO. XVIII 13 CHAIRMAN COX: Item XVIII, consideration 14 and possible discussion and/or action on external and 15 internal audits and/or reviews relating to the Texas 16 Lottery Commission and/or the Internal Audit 17 Department's activities. 18 Ms. Melvin. 19 MS. MELVIN: Good afternoon. Again, for 20 the record, Catherine Melvin of the Internal Audit 21 Department. I have no items of update this afternoon 22 but am happy to answer any questions you might have. 23 CHAIRMAN COX: None, thank you. 24 MS. MELVIN: Thank you. 25 AGENDA ITEM NO. XIX 0184 1 CHAIRMAN COX: Okay. Item XIX, report, 2 possible discussion and/or action on the Mega Millions 3 game and/or contract. 4 Director Sadberry. 5 MR. SADBERRY: Commissioners, the next 6 scheduled meeting of the directors of the Mega 7 Millions member states is June this year in Annapolis, 8 Maryland. Subject to developments, I would plan to 9 attend that meeting in person. 10 A couple of matters of interest. There 11 are some discussions among the directors for 12 consideration of certain informal initiatives, 13 including purchasing groups and advertising and 14 marketing in our joint efforts. Those are exploratory 15 at this time. Should they develop and mature to 16 potential opportunities, I will advise you. 17 CHAIRMAN COX: Thank you, Director 18 Sadberry. 19 Okay. We've done Item XX. 20 AGENDA ITEM NO. XXIV 21 CHAIRMAN COX: Why don't we do Item 22 XXIV, report by the Executive Director and/or possible 23 discussion and/or action on the agency's operational 24 status, activities relating to the Charitable Bingo 25 Operations Division, agency procedures and FTE status. 0185 1 Director Sadberry. 2 MR. SADBERRY: Commissioners, you have 3 in your binders the FTE status report. In addition to 4 that, I would like to advise you of another matter 5 involving the Texas Workforce Commission, a Civil 6 Rights Division review of personnel, policies and 7 procedures. 8 On March 6th through 8th, 2007, the 9 Civil Rights Division of the Texas Workforce 10 Commission conducted a review of the Texas Lottery 11 Commission personnel, policing and procedures. The 12 purpose of the review was to determine whether the 13 agency's policies and procedures were in compliance 14 with the Texas Commission on Human Rights Act. 15 The following policies and procedures 16 were reviewed: Hiring and promotions, including a 17 review of the recruitment plan, performance 18 evaluations, disciplinary actions, work place 19 accommodations, equal employment opportunity, 20 including sexual harassment policies. 21 During the on-site visit, the reviewer, 22 Mr. Dennis Swinney, conducted an analysis of the 23 agency's policies and procedures and reviewed these 24 findings with Janine Mays, John Shaw and Sarah Woelk. 25 On April 13, 2007, the agency received a 0186 1 letter from the Civil Rights Division outlining its 2 recommendations. Out of the 52 policy procedures 3 identified for compliance, the agency was in 4 compliance with 47. The five identified as not in 5 compliance will be addressed so as to be in compliance 6 within the next three to four weeks. 7 Once the recommendations have been 8 implemented by the agency, the Civil Rights Division 9 will be able to certify that the policies and 10 procedures of the agency are in compliance with the 11 Texas Commission on Human Rights Act. A letter of 12 certification will complete the review process. 13 And that concludes my report. I would 14 be happy to answer any questions. 15 CHAIRMAN COX: With your permission, I 16 would like to go into executive session. I've been 17 told that we're keeping people away from lunch a 18 little too long. And we'll do the agreed orders after 19 we get back. 20 COMMISSIONER CLOWE: Certainly. 21 AGENDA ITEM NO. XXI 22 CHAIRMAN COX: At this time I move the 23 Texas Lottery Commission go into executive session: 24 A. To deliberate the duties and evaluation 25 of the Executive Director, Deputy Executive Director 0187 1 and Internal Audit Director, deliberate the duties, 2 appointment and/or employment of the Charitable Bingo 3 Operations Director, to deliberate the duties, 4 appointment and/or employment of an Acting Charitable 5 Bingo Operations Director and to deliberate the duties 6 of the General Counsel, pursuant to Section 551.074 of 7 the Texas Government Code; 8 B. To receive legal advice regarding 9 pending or contemplated litigation pursuant to Section 10 551.071(1)(A) and/or to receive legal advice regarding 11 settlement offers pursuant to Section 551.071(1)(B) of 12 the Texas Government Code and/or to receive legal 13 advice pursuant to Section 551.071(2) of the Texas 14 Government Code, including but not limited to: 15 Cynthia Suarez versus Texas Lottery 16 Commission; Shelton Charles versus Texas Lottery 17 Commission and Gary Grief; Stephen Martin versus Texas 18 Lottery Commission; First State Back of DeQueen, 19 et al, versus Texas Lottery Commission; employment 20 law, personnel law, procurement and contract law, 21 evidentiary and procedural law and general government 22 law; 23 C. To deliberate the negotiation -- and we 24 don't need C. Is there a second? 25 COMMISSIONER CLOWE: Second. 0188 1 CHAIRMAN COX: All in favor, say "Aye." 2 Aye. 3 COMMISSIONER CLOWE: Aye. 4 CHAIRMAN COX: The vote is 2-0. The 5 Texas Lottery will go into executive session. The 6 time is 1:13 p.m. Today is April 18, 2007. 7 (Off the record for executive session: 8 1:13 p.m. to 2:41 p.m.) 9 AGENDA ITEM NO. XXII 10 CHAIRMAN COX: The Texas Lottery 11 Commission is out of executive session. The time is 12 2:41 p.m. 13 Is there any action to be taken as a 14 result of executive session? 15 AGENDA ITEM NO. XXIII 16 CHAIRMAN COX: If not, let's move on to 17 Item XXIII, consideration of the status and possible 18 entry of orders. Ms. Kiplin. 19 MS. KIPLIN: Commissioners, if I may, I 20 would like to take Items A through K together. These 21 are all lottery retailer cases, and they're all cases 22 that were taken over at the State Office of 23 Administrative Hearings for disciplinary action, based 24 on insufficient funds being available at the time that 25 the lottery swept their accounts. 0189 1 They fall in either one of two 2 categories. One, we swept it once and money wasn't 3 there and they haven't paid it, or it happened more 4 than three times in a calendar year. And so they hit 5 the three strikes and you're out. 6 The staff recommended revocation of each 7 of their licenses in those cases, and the proposal for 8 decision supports those findings and those 9 conclusions. 10 COMMISSIONER CLOWE: Move the adoption 11 of the staff recommendation. 12 CHAIRMAN COX: On Items A through K? 13 Second. 14 All in favor, say "Aye." 15 COMMISSIONER CLOWE: Aye. 16 CHAIRMAN COX: Aye. 17 Opposed? 18 Okay. Motion carries 2-0. 19 MS. KIPLIN: I would like to next take 20 up Item L and then move to Item M. Item L is a 21 registry worker case, and it's a removal case. The 22 worker is Mr. Jerry Lopez. 23 In this case, Commissioners, there was a 24 conviction -- And I'm trying to get a time line in 25 front of me -- on Mr. Lopez of an assault Class A. He 0190 1 later pled guilty in January of '03 on assault. 2 Now, this gentleman was added after 3 that. We've looked at the time line to try to get an 4 idea of why now, you know, why is it a removal? This 5 is 2007. And I believe at that time the background 6 investigations were conducted in the regional. 7 Offices. And this one came back that that was not a 8 crime of moral turpitude. That is incorrect. It is a 9 crime -- 10 CHAIRMAN COX: Is that correct or 11 incorrect? 12 MS. KIPLIN: That statement made by the 13 investigator in '04 is incorrect. It is a crime, 14 misdemeanor involving moral turpitude flat-out. Under 15 the reorganization, the background specialist caught 16 that in January of '06. That's what has led to the 17 removal action against this particular gentleman. 18 His conviction was in '03. He won't be 19 eligible for 10 years from that period of time. And 20 the staff does recommend adopting the State Office of 21 Administrative Hearings' proposal for decision and 22 removing this gentleman from the registry. 23 CHAIRMAN COX: Okay. Now, this is on 24 Item L? 25 MS. KIPLIN: Yes, that's correct. 0191 1 COMMISSIONER CLOWE: Move the adoption 2 of the staff recommendation. 3 CHAIRMAN COX: Second. 4 All in favor, say "Aye." 5 COMMISSIONER CLOWE: Aye. 6 CHAIRMAN COX: Aye. 7 Opposed, none. Passes 2-0. 8 MS. KIPLIN: The next item is another 9 registry worker case. It's a removal case. The 10 gentleman's name is Jeffrey Carpenter. This is 11 another one that we've gotten a time line on. And I 12 want to bring these facts to your attention. 13 This gentleman was actually -- let me 14 get this time line for you -- convicted in '97, 15 August of '97. We didn't have the registry then. The 16 registry didn't come into existence until I believe 17 2003. My understanding is that he was a worker for an 18 organization; so, therefore, his background would have 19 been run. So it leads to the question: Well, how did 20 all these years go by without catching this 21 conviction? 22 The background tape did not reflect, as 23 I understand it -- and this is a conversation that I 24 had with Mr. Bates here -- but with Jim Carney -- but 25 apparently the background tape did not pick up this 0192 1 arrest. And then you would go to a conviction. What 2 actually occurred in this case was, he came up, as I 3 understand it, for a renewal review and there was 4 another arrest on there. It was an arrest for 5 possession of a controlled substance. There was not a 6 disposition, and so that led to the background 7 specialist pursuing getting the more comprehensive 8 criminal history. 9 And while that arrest is still pending, 10 the possession of controlled substance, the second 11 strata, if you will, from DPS did then indicate the 12 arrest for the assault, which was a conviction in '97. 13 And that is a misdemeanor involving moral turpitude. 14 And so in my conversation with Jim 15 Carney, he is going to follow up with two different 16 offices -- one is the Department of Public Safety; the 17 other one is Tarrant County. This is where this 18 conviction occurred in '97 -- and try to glean why 19 this arrest and the resulting conviction did not 20 surface when one would think that it would surface. 21 Now, I'm offering that to explain the 22 timing on this matter. Putting that aside, it still 23 is a misdemeanor involving moral turpitude, and so it 24 does make him ineligible for being on the registry. 25 And based on that, the staff does recommend that the 0193 1 Commission adopt the Administrative Law Judge's 2 findings and conclusions and enter an order removing 3 him from the registry. 4 COMMISSIONER CLOWE: Move the adoption 5 of the staff recommendation. 6 CHAIRMAN COX: Second. 7 All in favor, say "Aye." 8 COMMISSIONER CLOWE: Aye. 9 CHAIRMAN COX: Aye. 10 No? 11 Motion passes 2-0. 12 MS. KIPLIN: Commissioners, your last 13 case is an agreed order case. It's out of the Lottery 14 Operations part of the agency. And it was a 15 complaint-driven investigation that had to do with use 16 of a credit card to purchase a lottery ticket. We had 17 an investigator out of the Enforcement Division who 18 conducted the investigation. And subsequently, as 19 part of his investigation, he himself bought tickets 20 on a credit card. 21 This has led to an agreed order. And 22 the recommendation coming out of this agreed order, it 23 is a suspension of this retailer's license for 30 24 days. And staff does recommend that the Commission 25 enter this agreed order to suspend this retailer's 0194 1 license for 30 days. 2 COMMISSIONER CLOWE: Move the adoption 3 of the staff recommendation. 4 CHAIRMAN COX: Second. 5 All in favor, say "Aye." 6 COMMISSIONER CLOWE: Aye. 7 CHAIRMAN COX: Aye. 8 Opposed? 9 Motion carries 2-0. 10 All right. That concludes those cases, 11 Kim? 12 MS. KIPLIN: Yes, that's correct. 13 AGENDA ITEM NO. XXV 14 CHAIRMAN COX: Okay. Item XXV, is there 15 any public comment. Anyone wishing to make public 16 comment? 17 AGENDA ITEM NO. XXVI 18 CHAIRMAN COX: Okay. This meeting is 19 adjourned. 20 (Commission meeting adjourned at 21 2:51 p.m.) 22 23 24 25 0195 1 C E R T I F I C A T E 2 STATE OF TEXAS ) 3 COUNTY OF TRAVIS ) 4 I, Aloma J. Kennedy, a Certified 5 Shorthand Reporter in and for the State of Texas, do 6 hereby certify that the above-mentioned matter 7 occurred as hereinbefore set out. 8 I FURTHER CERTIFY THAT the proceedings 9 of such were reported by me or under my supervision, 10 later reduced to typewritten form under my supervision 11 and control and that the foregoing pages are a full, 12 true and correct transcription of the original notes. 13 IN WITNESS WHEREOF, I have hereunto set 14 my hand and seal this 2nd day of May 2007. 15 16 ________________________________ 17 Aloma J. Kennedy Certified Shorthand Reporter 18 CSR No. 494 - Expires 12/31/08 19 Firm Certification No. 276 Kennedy Reporting Service, Inc. 20 Cambridge Tower 1801 Lavaca Street, Suite 115 21 Austin, Texas 78701 512.474.2233 22 23 24 25